PROSPECTUS & APPLICATION
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
INVESTMENT STRATEGY
GLOBAL INCOME
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes Class I and Class II shares of the Franklin Global
Government Income Fund (the "Fund"). It contains information you should know
before investing in the Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIALBEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II shares, dated March 1, 1997, which may be amended from time to time. It
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAl.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
March 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary .................................... 2
Financial Highlights................................ 3
How does the Fund Invest its Assets?................ 6
What are the Fund's Potential Risks?................ 15
Who Manages the Fund?............................... 20
How does the Fund Measure Performance?.............. 22
How Taxation Affects the Fund and its Shareholders.. 22
How is the Trust Organized?......................... 24
About Your Account
How Do I Buy Shares?................................ 25
May I Exchange Shares for Shares of Another Fund?... 31
How Do I Sell Shares?............................... 34
What Distributions Might I Receive from the Fund?... 36
Transaction Procedures and Special Requirements..... 37
Services to Help You Manage Your Account............ 41
What If I Have Questions About My Account?.......... 44
Glossary
Useful Terms and Definitions........................ 44
Appendix
Description of Ratings.............................. 47
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Global Government Income Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended October 31, 1996. The Fund's actual expenses may vary.
Class I Class II
A. Shareholder Transaction Expenses+
Maximum Sales Charge
(as a percentage of Offering Price) 4.25% 1.99%
Paid at time of purchase 4.25%++ 1.00%+++
Paid at redemption++++ None 0.99%
Exchange Fee (per transaction) $5.00* $5.00*
B. Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.58% 0.58%
Rule 12b-1 Fees 0.10%** 0.65%**
Other Expenses 0.17% 0.17%
Total Fund Operating Expenses 0.85% 1.40%
C. Example
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $1,000 that you invest in the Fund.
1 Year 3 Years 5 Years 10 Years
Class I $51*** $68 $88 $143
Class II $34 $54 $86 $176
For the same Class II investment, you would pay projected expenses of $24
if you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.15% for Class I shares and 0.65% for Class II
shares. 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 charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent six periods appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Year Ended October 31, Year Ended January 31,
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS I SHARES: 1996 1995 1994 19932 1993 1992 1991 1990 19891
Per Share Operating Performance
Net Asset Value
at Beginning of Period $8.31 $8.06 $9.33 $8.61 $9.39 $9.34 $9.58 $0.39 $10.00
Net investment Income 0.61 0.67 1.30 0.58 0.83 0.86 1.05 1.11 0.66
Net Realized &
Unrealized Gains
(Losses) on Securities 0.330 0.290 (1.806) 0.716 (0.698) 0.246 (0.174) (0.804) 0.296
Total From
Investment Operations 0.940 0.960 (0.506) 1.296 0.132 1.106 0.876 0.306 0.956
Distribution From
Net Investment Income (0.600) (0.645) (0.078) (0.576) (0.713) (0.900) (1.107)( 1.116) (0.558)
Distributions
From Capital Gains - - (0.083) - (0.075) (0.156) (0.009) - (0.008)
Distributions
From Return of Capital - (0.065) (0.603) - (0.124) - - - -
Total Distributions (0.600) (0.710) (0.764) (0.576) (0.912) (1.056) (1.116) (1.116) (0.566)
Net Asset Value
at End of Period $8.65 $8.31 $8.06 $9.33 $8.61 $9.39 $9.34 $9.58 $10.39
Total Return** 11.80% 12.65% (5.72)% 15.14% 1.08% 12.15% 9.27% 2.69% 9.52%
Ratios/Supplemental Data:
Net Assets at
End of Period
(in 000's) $137,626 $164,970 $187,204 $195,627 $153,899 $78,911 $29,660 $12,421 $5,604
Ratio of Expenses
to Average Net Assets 0.85% 0.96% 0.89% 0.77%* 0.72%*** 0.50%*** 0.25% 0.03% -
Ratio of Net Income
to Average Net Assets 7.68% 8.29% 8.54% 6.74%* 7.08% 7.87% 11.80% 11.97% 9.92%
Portfolio Turnover Rate 139.71% 103.49% 80.69% 67.36% 49.20% 155.40% 72.21% 41.34% 2.05%
</TABLE>
CLASS II SHARES:++ 1996 1995+
Per Share Operating Performance
Net Asset Value
at Beginning of Period $8.31 $8.03
Net investment Income 0.56 0.31
Net Realized & Unrealized
Gains (Losses) on Securities 0.334 0.301
Total From
Investment Operations 0.894 0.611
Distribution From
Net Investment Income (0.554) (0.301)
Distributions
From Capital Gains - -
Distributions
From Return of Capital - (0.030)
Total Distribution (0.554) (0.331)
Net Asset Value
at End of Period $8.65 $8.31
Total Return** 11.19% 7.09%
Ratios/Supplemental Data:
Net Assets at
End of Period (in 000's) $3,700 $1,193
Ratio of Expenses
to Average Net Assets 1.40% 1.54%*
Ratio of Net Income
to Average Net Assets 7.17% 7.41%*
Portfolio Turnover Rate 139.71% 103.49%
1For the period March 15, 1988 (effective date of registration) to January 31,
1989.
2For the nine months ended October 31, resulting from a change in fiscal year
end from January 31.
+For the period ended May 1, 1995 to October 31, 1995.
++Ratios have been calculated using daily average net assets during the period.
*Annualized
**Total return measures the change in value of an investment over the periods
indicated and is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value. Prior to May 1, 1994,
dividends were reinvested at the maximum Offering Price.
***During the periods indicated, Advisers agreed in advance to waive a portion
of its management fees and to make certain payments to reduce expenses of the
Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
1992 0.80%
1993 0.73%
How does the Fund Invest its Assets?
The Fund's Investment Objective
The Fund's 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. Of course, there is no assurance that the
Fund's objective will be achieved.
Types of Securities in which the Fund May Invest
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in securities issued or guaranteed by domestic and foreign governments
and their political subdivisions, including the U.S. government, its agencies,
and authorities or instrumentalities ("U.S. government securities"). Securities
issued by central banks that are guaranteed by their national governments are
considered to be government securities.
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 are generally considered "derivative securities." A detailed
description of these financial transactions is included below. The risk
considerations involved in global investing generally are included under "What
are the Fund's Potential Risks?"
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. 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").
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. 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 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.
The Fund may invest in debt securities with varying maturities. Under current
market conditions, it is expected that the dollar-weighted average maturity of
the Fund's investments will not exceed 15 years. Generally, the portfolio's
average maturity will be shorter when, in the opinion of Advisers, 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 SAI. 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 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 a government
jurisdiction that are not backed by its full faith and credit and general taxing
powers.
The Fund will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its objective 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 may involve greater
exposure to the risks ordinarily associated with foreign investing. See "What
are the Fund's Potential Risks? - Foreign Securities." Advisers does not
currently expect the Fund's investments in less developed and developing
countries to exceed 20% of the Fund's 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.
Bank 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).
Loan Participations. The Fund is authorized to acquire loan participations in
which the Fund will buy from a lender a portion of a larger loan that it has
made to a borrower. Generally, 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. 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 SAI.
Lower Rated Debt Obligations. The Fund may invest in higher yielding, higher
risk, lower rated debt obligations that are rated at least B by Moody's, or S&P,
or if unrated, are at least of comparable quality as determined by Advisers. The
Fund currently holds approximately 13% in lower rated investments and may in the
future increase this percentage, but such investments will be less than 35% of
the Fund's net assets. Many debt obligations of foreign issuers, especially
developing market issuers, are not rated by U.S. rating agencies and their
selection depends on Advisers' internal analysis. Securities rated BB or lower
by S&P or Ba or lower by Moody's (sometimes referred to as "junk bonds") are
regarded as predominately speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation
and therefore involve special risks. See "What are the Fund's Potential Risks? -
High Yielding, Fixed-Income Securities" and the "Appendix" for a discussion of
the ratings categories.
Currency Techniques and Hedging. The Fund intends to pursue its investment
objective through investments in options, futures, options on futures and
forward contracts. These securities are generally considered "derivative
securities." Investment in these securities is not a fundamental policy of the
Fund, and may be changed at the discretion of the Board without prior notice or
shareholder approval. While there are no specific limits on the Fund's use of
these practices other than those limits stated below, the Fund only engages in
these practices for hedging purposes, or in other words for the purpose of
protecting against declines in the value of the Fund's portfolio securities and
the income on these securities. The production of additional income may at times
be a secondary purpose of these practices.
Forward Currency Exchange Contracts. The Fund may enter into forward currency
exchange contracts ("Forward Contract[s]") to attempt to minimize the risk to
the Fund from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to buy 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.
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 daily. The ability of the Fund to
enter into Forward Contracts is limited only to the extent Forward Contracts
would, in the opinion of Advisers, 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 buy put and call options on U.S. or foreign securities that
are traded on U.S. and foreign securities exchanges and in over-the-counter
markets.
Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call. A call option is also covered if the
Fund holds a call on the same security and in the same principal amount as the
call written and the exercise price of the call held is (a) equal to or less
than the exercise price of the call written, or (b) greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations in a segregated
account with its custodian bank.
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 canceled 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 in a secondary market with respect to options it has written, 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 described under "What are
the Fund's Potential Risks?" In addition, a foreign exchange may impose
different exercise and settlement terms, procedures and margin requirements than
a U.S. exchange.
The Fund may buy 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 buy 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 resulting in a
loss to the Fund equal to the cost of the options.
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 (including 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
SAI.
Options on Foreign Currencies. The Fund may buy 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 buy 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 SAI.
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 buy 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 that otherwise might either adversely affect
the value of the Fund's portfolio securities or adversely affect the prices of
securities that the Fund intends to buy 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.
The Board has 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 buy 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. A further discussion of the use, risks
and costs of Futures Contracts and Options on Futures Contracts is included in
the SAI.
Other Investment Policies of the Fund
During periods when Advisers believes that the Fund should be in a temporary
defensive position, the Fund may have less than 25% of its assets concentrated
in foreign government securities and may invest instead in U.S. government
securities. 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: CDs, 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.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 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 bank 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%. This
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. The Fund may engage in security loan arrangements
with the primary objective of increasing the Fund's income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. 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 "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 buy 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 the Fund 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 buy a security on a when-issued or forward delivery
basis, it will set up segregated accounts, as described in "Forward Currency
Exchange Contracts" above, concerning such purchases. Although the Fund does not
intend to make such purchases for speculative purposes, purchases of securities
on such basis may involve more risk than other types of purchases. For example,
if the Fund determines it is necessary to sell the when-issued or forward
delivery securities before delivery, it may incur a gain or loss because of
market fluctuations since the time the commitment to buy the securities was
made.
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund buys 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 that are deemed creditworthy by Advisers. 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 bank approved by the 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 dealer 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. Advisers will
evaluate the creditworthiness of these entities prior to engaging in such
transactions, under the general supervision of the Board.
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.
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 Investments. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
Portfolio Turnover. The Fund's portfolio turnover rate for the fiscal years
ended October 31, 1995, and October 31, 1996, was 103.49% and 139.71%,
respectively. The high portfolio turnover rate for both fiscal years was due to
changing market conditions and a higher level of redemptions than in previous
years. High portfolio turnover may increase the Fund's transaction costs.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
What are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
Interest Rate, Currency and Market Risk. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable and may happen again in the future.
Non-Diversification Risk. 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 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 non-diversified 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.
Foreign Currency. The Fund may invest in debt securities denominated in U.S. and
foreign currencies. A change in the value of any 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. These 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 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 its distributions. Similarly, if an exchange rate depreciates
between the time the Fund incurs expenses in U.S. dollars and the time the
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.
Foreign Securities. Investment in foreign securities involves certain risks that
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). Foreign
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 foreign 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 is contained in reports and reflected in ratings
published for 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. 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.
Confiscatory taxations or diplomatic developments could also affect investment
in those countries.
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.
High Yielding, Fixed-Income Securities. The Fund's investments in higher
yielding, lower-rated securities entail special risks. The market value of lower
rated, fixed-income securities and unrated securities of comparable quality,
commonly known as "junk bonds," tends to reflect individual developments
affecting the issuer to a greater extent than the market value of higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. These lower rated fixed-income
securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Baa by Moody's, ratings
which are considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these 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, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the Fund
may have unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the Fund's net
assets are impacted prior to the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although these 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, Advisers may find it necessary to replace
the securities with lower yielding securities, which could result in less net
investment income to the Fund. The premature disposition of a high yielding
security due to a call or buy-back feature, the deterioration of the issuer's
creditworthiness, or a default may also make it more difficult for the Fund to
manage the timing of its receipt of income, which may have tax implications. The
Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute the
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on these obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Generally, buyers of
these securities are predominantly dealers and other institutional buyers,
rather than individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher rated securities. Reduced liquidity
in the secondary market may have an adverse impact on market price and the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs, or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "How are Fund Shares Valued?" in the SAI.)
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of these 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. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's Net Asset Value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
Asset Composition Table. A credit rating by a rating agency evaluates only the
safety of principal and interest of a security, and does not consider the market
value risk associated with the investment. The table below shows the percentage
of the Fund's assets invested in fixed income securities rated in each of the
specific rating categories shown and those that are not rated by the rating
agency but deemed by Advisers to be of comparable credit quality. The
information was prepared based on a dollar weighted average of the Fund's
portfolio composition based on month-end assets for each of the 12 months in the
fiscal year ended October 31, 1996. The Appendix to this prospectus includes a
description of each rating category.
Average Weighted
S&P Rating Percentage of Assets
AAA 85.9%
AA 1.3%
BB 4.8%
BB-* 5.4%
B+ 2.5% *1.9% of these securities, which are unrated by the rating agency, have
been included in the BB- rating category.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $179 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
Under an agreement with Advisers, TICI is the sub-advisor of the Fund. TICI
provides Advisers with investment management advice and assistance. The
agreement provides for the sub-advisor to furnish, subject to Advisers'
discretion, a portion of the investment advisory services for which Advisers is
responsible pursuant to the management agreement. These responsibilities may
include managing a portion of the Fund's investments and supplying research
services. TICI's activities are subject to the Board's review and control, as
well as Advisers' instruction and supervision.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Thomas J. Dickson since 1993, Neil S. Devlin since 1994 and
Thomas Latta since 1995.
Thomas J. Dickson
Portfolio Manager of TICI
Mr. Dickson received his bachelor of science degree in managerial economics from
the University of California at Davis. Mr. Dickson joined the Franklin Templeton
Group in 1992.
Neil S. Devlin
Executive Vice President of TICI
Mr. Devlin is a Chartered Financial Analyst and holds a bachelor of arts degree
in economics and philosophy from Brandeis University. Mr. Devlin joined the
Franklin Templeton Group in 1987.
Thomas Latta
Portfolio Manager of TICI
Mr. Latta attended the University of Missouri and New York University. Mr. Latta
has been in the securities industry since 1981 and with the Franklin Templeton
Group since 1991. Prior to joining the Franklin Templeton Group, Mr. Latta
worked as a portfolio manager with Forester and Hairston, a global fixed-income
investment management firm, and prior thereto, he worked as an investment
adviser with Merrill Lynch.
Management Fees. During the fiscal year ended October 31, 1996, management fees
totaling 0.58% of the average monthly net assets of the Fund were paid to
Advisers. Total expenses, including fees paid to Advisers were 0.85% for Class I
and 1.40% for Class II. During the same period, Advisers paid TICI a
sub-advisory fee totaling 0.25% of the average monthly net assets of the Fund.
This fee is not a separate expense of the Fund but is paid by Advisers from the
management fees it receives from the Fund.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
The Rule 12b-1 Plans
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for activities
primarily intended to sell shares of the class. These expenses may include,
among others, distribution or service fees paid to Securities Dealers or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates, printing prospectuses and reports used for sales purposes, preparing
and distributing sales literature and advertisements, and a prorated portion of
Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.15% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.50% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.15% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
How Taxation Affects the Fund and its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes.
The Fund has elected and intends to continue to qualify 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.
Regular income dividends (which are generally distributed monthly) will be
determined from the Fund's net investment income, excluding any realized net
foreign currency gains and losses. Under the Code, net realized foreign currency
gains and losses are required to be reported as ordinary income or loss to the
Fund. Therefore, if in the course of a fiscal year, the Fund realizes net
foreign currency losses, the Fund may be required to reclassify all or a portion
of its income dividend distributions made during such fiscal year as a
return-of-capital for federal income tax purposes. Net foreign currency gains,
if any, will generally be distributed as a supplemental income dividend once
each year in December to reflect any net foreign currency gain realized by the
Fund as of October 31 of the current fiscal year. You will be informed of the
tax status of all distributions shortly after the close of each calendar year.
For federal income tax purposes, any income dividends which you receive 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 you have 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 you have 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 you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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.
For corporate shareholders, it is anticipated that no portion of the Fund's
dividends will qualify for the corporate dividends-received deduction.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of foreign
taxes paid by the Fund. For more information, please see the SAI.
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's investment in options, futures contracts, forward contracts, and
options on futures contracts, including transactions involving actual or deemed
short sales, may give rise to taxable income, gain or loss and will be subject
to special tax treatment under certain mark-to-market and straddle rules, the
effect of which may be to accelerate income to the Fund, defer Fund losses,
cause adjustments in the holding periods of Fund securities, convert capital
gains and losses into ordinary income and losses, convert long-term capital
gains into short-term capital gains, and convert short-term capital losses into
long-term capital losses. These rules could, therefore, affect the amount,
timing and character of distributions to shareholders. Certain elections may be
available to the Fund to mitigate some of the unfavorable consequences of the
provisions described in this paragraph. These investments and transactions are
discussed in the SAI.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
How is the Trust Organized?
The Fund is a non-diversified series of Franklin Investors Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. As of January 1, 1997, the
Fund began offering a new class of shares designated Franklin Global Government
Income Fund Advisor Class. All shares outstanding before the offering of Advisor
Class shares have been designated Franklin Global Government Income Fund - Class
I and Franklin Global Government Income Fund - Class II. Additional series and
classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
Minimum
Investments*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this, you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
Total Sales Charge Amount Paid
as a Percentage of to Dealer as a
Amount of Purchase Offering Net Amount Percentage of
at Offering Price Price Invested Offering Price
CLASS I
Under $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 None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the purchase price.
3. Class I purchases by certain retirement plans - up to 1% of the purchase
price.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the purchase price.
A Securities Dealer may only receive one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 3 above will be eligible to receive the Rule
12b-1 fee associated with the purchase starting in the thirteenth calendar month
after the purchase.
For breakpoints that may apply and information on additional compensation
payable to Securities Dealers in connection with the sale of fund shares, please
see "How Do I Buy, Sell and Exchange Shares? - Other Payments to Securities
Dealers" in the SAI.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
Method Steps to Follow
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
Please notify us in writing if you do not want this option to be available on
your account. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
Limited Exchanges Between Different Classes of Shares
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Class Z" shares. Beginning on or about May 1,
1997, you may exchange Class Z shares of Franklin Mutual Series Fund Inc. for
Class I shares of the Fund at Net Asset Value.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
Method Steps to Follow
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
Telephone requests will be accepted: you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
By Phone Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and o If the request is $50,000 or less. Institutional
sent to us accounts may exceed $50,000 by completing a separate
the telephone agreement. Call Institutional Services to receive a copy.
redemption
agreement o If there are no share certificates issued for the shares
included with you want to sell or you have already returned them
this prospectus) to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 30 days
Through Your Dealer Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. Please
notify us in writing if you do not want this option to be available on your
account. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
What Distributions Might I Receive from the Fund?
The Fund declares dividends from its net investment income monthly to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor before signing. A notarized
signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
Type of Account Documents Required
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
Automatic Payroll Deduction - Class I Only
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
Electronic Fund Transfers - Class I Only
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS. The code number
is 135 for Class I and 235 for Class II.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. TICI is
located at Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida
33394-3091. You may also contact us by phone at one of the numbers listed below.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II" and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timers - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Qualified Retirement Plans - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
Appendix
Description of Ratings
Corporate Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PROSPECTUS & APPLICATION
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
INVESTMENT STRATEGY
INCOME
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes the Class I shares of the Franklin Short-Intermediate
U.S. Government Securities Fund (the "Fund"). It contains information you should
know before investing in the Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I
shares, dated March 1, 1997, which may be amended from time to time. It includes
more information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporated by reference into this prospectus. For a free
copy or a larger print version of this prospectus, call 1-800/DIAL BEN or write
the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE TERMS THAT ARE CAPITALIZED. THIS
MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary.............................. 2
Financial Highlights......................... 3
How does the Fund Invest its Assets?......... 6
What are the Fund's Potential Risks?......... 9
Who Manages the Fund?........................ 9
How does the Fund Measure Performance?....... 11
How Taxation Affects the
Fund and its Shareholders................... 12
How is the Trust Organized?.................. 13
ABOUT YOUR ACCOUNT
How Do I Buy Shares?......................... 14
May I Exchange Shares
for Shares of Another Fund?................. 19
How Do I Sell Shares?........................ 21
What Distributions
Might I Receive from the Fund?.............. 23
Transaction Procedures
and Special Requirements.................... 24
Services to Help You Manage Your Account..... 29
What If I Have Questions About My Account?... 31
GLOSSARY
Useful Terms and Definitions................. 32
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
October 31, 1996. The Fund's actual expenses may vary.
A. 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*
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees.............................. 0.56%
Rule 12b-1 Fees.............................. 0.08%**
Other Expenses............................... 0.10%
-----
Total Fund Operating Expenses................ 0.74%
=====
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$30*** $46 $63 $112
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
its Net Asset Value or dividends and are not directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.10%. 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 charge permitted under the
NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent six periods appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31, FOR THE YEAR ENDED JANUARY 31,
1996 1995 1994 19932 1993 1992 1991 1990 1989 19881
-----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE+
Net Asset Value at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period $10.35 $10.03 $10.80 $10.57 $10.39 $10.30 $10.16 $10.12 $10.38 $10.00
Net Investment Income 0.58 0.56 0.49 0.38 0.57 0.58 0.76 0.78 0.78 0.64
Net Realized &
Unrealized Gains
(Losses) on Securities (0.080) 0.309 (0.696) 0.245 0.432 0.374 0.248 0.097 (0.300) 0.045
Total From
Investment Operations (0.500 .869 (.206) .625 1.002 .954 1.008 .877 .480 .685
Distributions From
Net Investment Income (0.570) (.549) (.472) (.390) (.565) (.786) (.864) (.837) (.740) (.305)
Distributions
From Capital Gains - - (.092) (.005) (.257) (.078) (.004) - - -
Total Distributions (0.570) (.549) (.564) (.395) (.822) (.864) (.868) (.837) (.740) (.305)
Net Asset Value
at End of Period $10.28 $10.35 $10.03 $10.80 $10.57 $10.39 $10.30 $10.16 $10.12 $10.38
Total Return++ 4.97% 8.90% (1.99)% 5.90% 10.01% 9.44% 10.19% 8.78% 4.63% 6.33%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End
of Period (in 000's) $196,042 $208,057 $225,352 $273,678 $235,382 $163,690 $48,981 $30,996 $29,150 $20,636
Ratio of Expenses
to Average Net Assets** 0.74% 0.73% 0.65% 0.55%* 0.56% 0.71% 0.48% 0.27% 0.25% 0.14%*
Ratio of Net
Investment Income
to Average Net Assets 5.64% 5.42% 4.75% 4.75%* 5.40% 5.90% 7.56% 7.60% 7.72% 6.5%*
Portfolio Turnover Rate 72.62% 56.34% 99.09% 31.71% 78.96% 102.05% 71.44% 151.36% 111.75% 13.14%*
</TABLE>
1For the period April 15, 1987 (effective date of registration) to January 31,
1988.
2For the nine months ended October 31, resulting from a change in fiscal year
end from January 31.
+Selected data for a share of beneficial interest outstanding throughout the
period.
++Total return measures the change in value of an investment over the periods
indicated and is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value. Prior to May 1, 1994,
dividends were reinvested at the max-imum Offering Price.
*Annualized.
**During the periods indicated, Advisers agreed in advance to limit its
management fees and to make certain payments to reduce expenses of the Fund. Had
such action not been taken, the ratios of operating expenses to average net
assets would have been as follows:
Ratio of Expenses
TO AVERAGE NET ASSETS
19881 0.81%*
1989 0.79%
1990 0.77%
1991 0.74%
1993 0.65%
19932 0.63%*
1994 0.68%
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to provide as high a level of current income
as is consistent with prudent investing while seeking preservation of
shareholder's capital. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. Of course, there is no assurance
that the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund intends to invest up to 100% of its net assets in U.S. government
securities. As a fundamental policy of the Fund, the Fund must invest at least
65% of its net assets in U.S. government securities. SEC guidelines require at
least 65% of the Fund's total assets be invested in U.S. government securities
and the Fund will follow that policy notwithstanding its fundamental policy. It
is the investment policy of the Fund (which may be changed upon notice to
shareholders) to maintain the average dollar weighted maturity of its portfolio
in a range of two to five years. Within this range, the Fund intends to
emphasize an average weighted maturity of 3 1/2 years or less.
The Fund may invest in obligations either issued or guaranteed by the U.S.
government and its agencies or instrumentalities including, but not limited to:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds; and obligations of U.S. government agencies or instrumentalities such as
Federal Home Loan Banks, Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives (including Central Bank
for Cooperatives), Federal Land Banks, Federal Intermediate Credit Banks,
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation or National Credit Union Administration.
Since inception, the assets of the Fund have been invested solely in direct
obligations of the U.S. Treasury and in repurchase agreements collateralized by
U.S. Treasury obligations. The level of income achieved by the Fund may not be
as high as that of other funds which invest in lower quality, longer-term
securities.
Certain of the U.S. government securities that the Fund may invest in may be
purchased at a discount. These 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 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 may also be realized upon the sale of securities.
ZERO COUPON BONDS. The Fund may, consistent with its other policies, invest in
zero coupon bonds issued or guaranteed by the U.S. government, 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 compounds 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 the Fund) consists of the difference between its face value
at maturity and its cost. These investments experience greater volatility in
market value due to changes in interest rates than debt obligations that 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.
TREASURY INFLATION-INDEXED SECURITIES. The Fund may, consistent with its other
policies, invest a portion of its assets in inflation-indexed securities issued
by the U.S. Treasury. In general, these debt securities are issued with various
maturities and pay interest semi-
ANNUALLY. Their principal value is adjusted for inflation, as measured by the
Consumer Price Index. Their interest payments are calculated at a fixed
percentage rate of the inflation-adjusted principal value as of the payment
date.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys 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 that are deemed creditworthy by Advisers. 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 bank approved by the Board and will be held
pursuant to a written agreement.
OTHER INVESTMENT POLICIES OF THE FUND
When-Issued and Delayed Delivery Transactions. The Fund may buy 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 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 buy securities on a when-issued basis with the intention
of acquiring the securities, it may sell the 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 bank,
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 objective and policies, and not for the purpose of investment
leverage. In when-issued and delayed delivery transactions, the Fund relies on
the seller to complete the transaction. The other party's failure may cause the
Fund to miss a price or yield considered advantageous. Securities purchased on a
when-issued or delayed delivery basis do not generally earn interest until their
scheduled delivery date. The Fund is not subject to any percentage limit on the
amount of its assets which may be invested in when-issued purchase obligations.
CONCENTRATION. The Fund will not invest more than 25% of the value of its total
assets in any one particular industry.
BORROWING. The Fund does not borrow money or mortgage or pledge any of 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
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank 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%. This
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. The Fund may engage in security loan arrangements
with the primary objective of increasing the Fund's income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. 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. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
The foregoing permissible investments and practices are 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 that are permitted, without limitation, to national banks, federal
savings and loan associations and federal credit unions. Please see the SAI for
more details on the Fund's policies regarding eligible federal credit union
investments.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
INTEREST RATE RISK. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $179 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio since its inception is: Jack Lemein, David Capurro and Tom
Runkel.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
David Capurro
Vice President of Advisers
Mr. Capurro holds a Master of Business Administration degree and a Bachelor of
Science degree in business administration from California State University at
Hayward. Mr. Capurro has been with the Franklin Templeton Group since 1985.
Tom Runkel
Vice President of Advisers
Mr. Runkel is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Santa Clara. He earned his Bachelor
of Arts degree in political science from the University of California at Davis.
Mr. Runkel has been with the Franklin Templeton Group since 1985. He is a member
of several securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996 management fees
totaling 0.56% of the average daily net assets of the Fund were paid to
Advisers. Total expenses of the Fund, including fees paid to Advisers, were
0.74%.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies, it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" for its Class I shares
under which it may reimburse Distributors or others for activities primarily
intended to sell shares of the class. These expenses may include, among others,
distribution or service fees paid to Securities Dealers or others who have
executed a servicing agreement with the Fund, Distributors or its affiliates,
printing prospectuses and reports used for sales purposes, preparing and
distributing sales literature and advertisements, and a prorated portion of
Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.10% per year of Class I's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. During the first year after certain
purchases made without a sales charge, Distributors may keep the Rule 12b-1 fees
associated with the purchase. For more information, please see "The Fund's
Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
The Fund also offers another share class and, from time to time, will advertise
its performance in a manner described in the prospectus for that class.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and intends to continue to qualify 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 that you receive 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 you have 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 you have owned Fund shares and regardless of whether the
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated as if received by you on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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 these shares.
You should consult with your tax advisor 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 October 31, 1996, qualified for the dividends received
deduction, and it is not anticipated that any of the current year's dividends
will qualify.
Many states grant tax-free status to dividends paid out to shareholders of
mutual funds from interest income earned by the mutual fund from direct
obligations of the U.S. government, subject in some cases to minimum investment
requirements to be met by the Fund. Investments in repurchase agreements
collateralized by U.S. government securities do not generally qualify for this
purpose. At the end of each calendar year, the Fund will provide you with the
percentage of any dividends paid that may qualify for tax-free status. You
should consult your tax advisor 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 your shares and to
distributions and redemption proceeds received from the Fund.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of these dividends
and distributions.
If you are not considered a U.S. person for federal income taxation purposes,
you should consult with your financial or tax advisor regarding the
applicability of U.S. withholding or other taxes to distributions received by
you from the Fund and the application of foreign tax laws to these
distributions.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Investors Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. As of January 1, 1997, the
Fund began offering a new class of shares designated Franklin Short-Intermediate
U.S. Government Securities Fund - Advisor Class. All shares outstanding before
the offering of Advisor Class shares have been designated Franklin
Short-Intermediate U.S. Government Securities Fund - Class I. Additional series
and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
Under $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 None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases"
above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 0.75% of the purchase price.
2. Purchases by certain retirement plans - up to 1% of the purchase price.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the purchase price.
A Securities Dealer may only receive one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 2 above will be eligible to receive the Rule 12b-1
fee associated with the purchase starting in the thirteenth calendar month after
the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
Please notify us in writing if you do not want this option to be available on
your account. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Class Z" shares. Beginning on or about May 1,
1997, you may exchange Class Z shares of Franklin Mutual Series Fund Inc. for
shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
BY PHONE Call Shareholder Services
(Only available if Telephone requests will be accepted:
you have completed
and sent to us the o If the request is $50,000 or less. Institutional
telephone redemption accounts may exceed $50,000 by completing a separate
agreement included agreement. Call Institutional Services to receive
with this prospectus) a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 30 days
THROUGH YOUR DEALER Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade. Capital
gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the reinvestment date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value and Offering
Price of the Fund in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Class I, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS. The Fund's code number is
136.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers two classes of shares,
designated "Class I" and "Advisor Class." The two classes have proportionate
interests in the Fund's portfolio. They differ, however, primarily in their
sales charge and expense structures. Certain funds in the Franklin Templeton
Funds also offer a share class designated "Class II."
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund.
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 2.25% sales charge.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN CONVERTIBLE SECURITIES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes the Franklin Convertible Securities Fund (the "Fund").
It contains information you should know before investing in the Fund. Please
keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated March 1, 1997,
which may be amended from time to time. It includes more information about the
Fund's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN or write the Fund at the
address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE BONDS
OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE COMMONLY KNOWN AS "JUNK BONDS."
THEIR DEFAULT AND OTHER RISKS ARE GREATER THAN THOSE OF HIGHER RATED SECURITIES.
YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE FUND. PLEASE
SEE "WHAT ARE THE FUND'S POTENTIAL RISKS?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN CONVERTIBLE SECURITIES FUND
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary............................. 2
Financial Highlights........................ 3
How does the Fund Invest its Assets?........ 6
What are the Fund's Potential Risks?........ 15
Who Manages the Fund?....................... 19
How does the Fund Measure Performance?...... 21
How Taxation Affects the
Fund and its Shareholders.................. 22
How is the Trust Organized?................. 23
ABOUT YOUR ACCOUNT
How Do I Buy Shares?........................ 24
May I Exchange Shares
for Shares of Another Fund?................ 30
How Do I Sell Shares?....................... 33
What Distributions
Might I Receive from the Fund?............. 35
Transaction Procedures
and Special Requirements................... 36
Services to Help You Manage Your Account ... 41
What If I Have Questions About My Account?.. 43
GLOSSARY
Useful Terms and Definitions ............... 43
APPENDIX
Description of Ratings ..................... 46
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended October 31, 1996. The Fund's actual expenses may vary.
CLASS I CLASS II
A. Shareholder Transaction Expenses+
Maximum Sales Charge
(as a percentage of Offering Price) 4.50% 1.99%
Paid at time of purchase.. 4.50%++ 1.00%+++
Paid at redemption++++.... None 0.99%
Exchange Fee (per transaction) $5.00* $5.00*
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............. 0.62% 0.62%
Rule 12b-1 Fees............. 0.23%** 1.00%**
Other Expenses.............. 0.17% 0.17%
----------------
Total Fund Operating Expenses 1.02% 1.79%
================
C. Example
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I............... $55*** $76 $ 99 $164
Class II.............. $38 $66 $106 $218
For the same Class II investment, you would pay projected expenses of $28 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**These fees may not exceed 0.25% for Class I. 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 charge permitted
under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent six periods appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Year Ended October 31, Year Ended January 31
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS I SHARES: 1996 1995 1994 19931 1993 1992 1991 1990 1989 19882
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE+
Net Asset Value
at Beginning of Period $12.73 $12.34 $12.79 $11.44 $10.48 $8.53 $9.31 $9.60 $9.10 $10.00
------------------------------------------------------------------------------------------------
Net Investment Income 0.61 0.58 0.59 0.45 0.61 0.44 0.78 0.80 0.78 0.58
Net Realized & Unrealized
Gains (Losses) on Securities1.389 1.099 (0.327) 1.413 1.034 2.194 (0.729) (0.395) 0.404 (1.168)
------------------------------------------------------------------------------------------------
Total From
Investment Operations 1.999 1.679 0.263 1.863 1.644 2.634 0.051 0.405 1.184 (0.588)
------------------------------------------------------------------------------------------------
Distributions From
Net Investment Income (0.600) (0.592) (0.594) (0.513) (0.684) (0.684) (0.831) (0.695) (0.684) (0.312)
Distributions
From Capital Gains (0.679) (0.697) (0.119) - - - - - - -
--------------------------------------------------------------------------------------------
Total Distributions (1.279) (1.289) (0.713) (0.513) (0.684) (0.684) (0.831) (0.695) (0.684) (0.312)
-------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $13.45 $12.73 $12.34 $12.79 $11.44 $10.48 $8.53 $9.31 $9.60 $9.10
================================================================================================
Total Return++ 16.71% 15.18% 2.07% 16.50% 16.12% 31.50% 0.37% 3.85% 13.08% (4.80)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets
at End of Period (in 000's)$130,951 $83,523 $66,869 $47,440 $28,307 $20,282 $15,843 $14,774 $17,290 $14,734
Ratio of Expenses
to Average Net Assets+++ 1.02% 1.03% 0.84% 0.25%* 0.25% 0.26% 0.25% 0.24% 0.25% 0.15 %*
Ratio of Net Investment
Income to Average Net Assets4.79% 4.82% 4.84% 5.25%* 6.01% 6.84% 8.90% 8.25% 8.27% 6.82%*
Portfolio Turnover Rate 129.83% 108.64% 68.39% 31.05% 60.00% 64.90% 45.42% 30.87% 70.75% 148.67%
Average Commission Rate** 0.0495 - - - - - - - - -
</TABLE>
YEAR ENDED OCTOBER 31,
CLASS II SHARES***: 1996 19953
-------------------------
Per Share Operating Performance+
Net Asset Value at Beginning of Period $12.71 $13.06
------------------------
Net Investment Income 0.51 0.07
Net Realized & Unrealized
Gains (Losses) on Securities 1.397 (0.373)
------------------------
Total From Investment Operations 1.907 (0.303)
==========================
Distributions From Net Investment Income (0.528) (0.047)
Distributions From Capital Gains (0.679) -
-------------------------
Total Distributions (1.207) (0.047)
--------------------------
Net Asset Value at End of Period $13.41 $12.71
==========================
Total Return++ 15.92% (2.33)%
Ratios/Supplemental Data:
Net Assets at End of Period (in 000's) $10,861 $209
Ratio of Expenses to Average Net Assets 1.79% 1.60%
Ratio of Net Investment
Income to Average Net Assets 4.00% 3.64%*
Portfolio Turnover Rate 129.83% 108.64%
Average Commission Rate** 0.0495 -
1For the nine months ended October 31, 1993 resulting from a change in fiscal
year end from January 31.
2For the period April 15, 1987 (effective date) to January 31, 1988.
3For the period October 2, 1995 (effective date) to October 31, 1995.
+Selected data for a share of beneficial interest outstanding throughout the
period.
++Total return measures the change in value of an investment over the periods
indicated and is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value. Prior to May 1, 1994,
dividends were reinvested at the maximum Offering Price. +++During the periods
indicated below, Advisers agreed in advance to waive all or a portion of its
management fees and to make certain payments to reduce expenses of the Fund. Had
such action not been taken, the ratios of operating expenses to average net
assets would have been as follows:
Class I
19882 0.94%*
1989 0.90%
1990 0.89%
1991 0.84%
1992 0.94%
1993 0.81%
19931 0.86%*
1994 0.92%
*Annualized.
**Represents the average commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
***Ratios have been calculated using daily average net assets during the period.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's 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 objective is a fundamental policy of
the Fund and may not be changed without shareholder approval. Of course, there
is no assurance that the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund pursues its 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. The Fund's policies permit investment in convertible and
fixed-income securities without restrictions as to a specified range of
maturities.
The Fund may invest up to 35% of its net assets in other securities
(nonconvertible equity securities and corporate bonds, covered call options and
put options, securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, repurchase agreements collateralized by U.S.
government securities, money market securities and securities of foreign
issuers), which, in the aggregate, are considered to be consistent with the
Fund's investment objective.
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. A convertible security is generally a debt obligation or
preferred stock that may be converted within a specified period of time into a
certain amount of common stock of the same or a different issuer. A convertible
security provides a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("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. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which the Fund may invest, consistent with its investment
objective and policies.
An investment in an enhanced convertible security may involve additional risks
to the Fund. The Fund may have difficulty disposing of such securities because
there may be a thin trading market for a particular security at any given time.
Reduced liquidity may have an adverse impact on market price and the Fund's
ability to dispose of particular securities, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as the
deterioration in the 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 liquid securities,
though there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The Fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to buy a specified
quantity of securities within a specified period of time at a specified price or
to receive cash in the case of stock index options.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although Advisers expects normally
to create synthetic convertibles whose two components represent one issuer, the
character of a synthetic convertible allows the Fund to combine components
representing distinct issuers, or to combine a fixed income security with a call
option on a stock index, when Advisers determines that such a combination would
better promote the Fund's investment objective. In addition, the component parts
of a synthetic convertible security may be purchased simultaneously or
separately; and the holder of a synthetic convertible faces the risk that the
price of the stock, or the level of the market index underlying the
convertibility component will decline.
LOWER RATED SECURITIES. When investing in convertible securities and
nonconvertible fixed-income debt securities, the Fund may buy both securities
rated by nationally recognized statistical rating agencies or in unrated
securities, depending upon prevailing market and economic conditions. Lists of
these ratings are shown in the Appendix to this prospectus.
Ratings, which represent the opinions of the rating services with respect to the
securities and are not absolute standards of quality, will be considered in
connection with the investment of the Fund's assets but will not be a
determining or limiting factor. Rather than relying principally on the ratings
assigned by rating services, the investment analysis of securities being
considered for the Fund's portfolio may also include, among other things,
consideration of relative values, based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, earnings prospects, the
experience and managerial strength of the issuer, responsiveness to changes in
interest rates and business conditions, debt maturity schedules and borrowing
requirements and the issuer's changing financial condition and public
recognition thereof.
Higher yields are ordinarily available from securities in the lower-rated
categories or from unrated securities of comparable quality. Convertible
securities generally fall within the lower-rated categories of rating agencies,
that is, securities rated Baa or lower by Moody's or BBB or lower by S&P. The
Fund may only invest in convertible and nonconvertible securities rated at least
B or above by Moody's, or S&P, or if unrated, are at least of comparable quality
as determined by Advisers. To the extent the Fund acquires securities rated B or
unrated securities of comparable quality, these 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. (A
breakdown of the securities' ratings is included under "What are the Fund's
Potential Risks? - Asset Composition Table.") The Fund will not invest in
securities Advisers believes 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 Advisers in its
evaluation of the overall investment merits of that security but will not
generally result in an automatic sale of the security.
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,
the Fund may write covered call options on securities it owns that are listed
for trading on a national securities exchange. The Fund may buy listed call
options provided that the value of the call options bought will not exceed 5% of
the Fund's net assets. The Fund may also buy put options on the common stock it
owns or may acquire through conversion or exchange. In addition, the Fund may
enter into options on stock indices.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the buyer of the option the right to buy and
obligates the writer of the option 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 buyer of an option pays a cash premium,
that 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 give the holder the right to buy the underlying security from the
writer 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 bank.
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 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 buy 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.
The Fund may buy call and put options on stock indices in order to hedge against
the risk of market or industry-wide stock price fluctuations. Call and put
options on stock indices are similar to options on securities except that,
rather than the right to buy or sell particular securities at a specified price,
options on a stock index give the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the underlying stock index
is greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
stock market generally (or in a particular industry or segment of the market)
rather than price movements in individual securities.
Transactions in options are generally considered "derivative securities." The
Fund's investment in options will be for portfolio hedging purposes in an effort
to stabilize principal fluctuations in seeking to achieve the Fund's investment
objective and not for speculation.
To the extent that the Fund does invest in options, it may be limited by the
requirements of the Code, for qualification as a regulated investment company.
These 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.
FOREIGN SECURITIES. The Fund may invest, without restriction, in foreign
securities. The Fund will generally buy foreign securities that are traded in
the U.S. or buy sponsored or unsponsored American Depositary Receipts ("ADRs"),
that 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, buy the securities of foreign issuers directly in foreign
markets. The Fund presently has no intention of investing more than 30% of its
net assets in foreign securities not publicly traded in the U.S.
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 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 holding of foreign
securities 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. Please see "What are the Fund's Potential
Risks? - Foreign Securities."
U.S. GOVERNMENT SECURITIES. The Fund may invest in securities which are
obligations of the U.S. government, its agencies or instrumentalities. 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. The Fund may invest in participation
certificates of the Government National Mortgage Association ("GNMAs"). 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 GNMAs
may fluctuate based upon factors such as changing interest rates. In addition,
the mortgages underlying GNMAs are subject to repayment prior to maturity, and
in times of falling mortgage interest rates premature repayments may be more
likely. To the extent GNMAs held by the Fund are prepaid, the returned principal
will be reinvested in new obligations at then-prevailing interest rates which
may be lower than those of previously held obligations.
OTHER INVESTMENT POLICIES OF THE FUND
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys 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 that are deemed creditworthy by Advisers. 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 bank approved by the Board 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 these 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 that 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 that 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 Advisers believes the price of the stock may decline and when,
for tax or other reasons, Advisers does not want to currently sell the stock or
convertible security it owns. In this 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
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank 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%. This
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. The Fund may engage in security loan arrangements
with the primary objective of increasing the Fund's income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. 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. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
CONCENTRATION. 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.
PORTFOLIO TURNOVER. The Fund's portfolio turnover rate was 129.83% for the
fiscal year ended October 31, 1996, and 108.64% for the fiscal year ended
October 31, 1995. The higher portfolio turnover rate for the fiscal year ended
October 31, 1996, was due to a determination by Advisers that in light of the
generally rising securities market in 1996 the Fund should take profits.
Additionally, the market experienced significant new issuances of convertibles,
many with terms (yield, premium, call protection, downside protection) that were
more attractive than existing positions held by the Fund. The Fund took
advantage of this opportunity to upgrade its holdings. High portfolio turnover
may increase the Fund's transaction costs.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
HIGH YIELDING, FIXED-INCOME SECURITIES. Because of the Fund's policy of
investing in higher yielding, higher risk securities, an investment in the Fund
is accompanied by a higher degree of risk than is present with an investment in
higher rated, lower yielding securities. Accordingly, an investment in the Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals. If you are on a fixed income or retired, you should also consider the
increased risk of loss to principal that is present with an investment in higher
risk securities such as those in which the Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated
fixed-income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these 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, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the Fund
may have unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the Fund's net
assets are impacted prior to the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although these 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, Advisers may find it necessary to replace
the securities with lower yielding securities, which could result in less net
investment income to the Fund. The premature disposition of a high yielding
security due to a call or buy-back feature, the deterioration of the issuer's
creditworthiness, or a default may also make it more difficult for the Fund to
manage the timing of its receipt of income, which may have tax implications. The
Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute the
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on these obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Generally, buyers of
these securities are predominantly dealers and other institutional buyers,
rather than individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher rated securities. Reduced liquidity
in the secondary market may have an adverse impact on market price and the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "How are Fund Shares Valued?" in the SAI.)
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of restricted 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. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy that continued into
1993, depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's Net Asset Value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of a security, and does not consider the market
value risk associated with the investment. The table below shows the percentage
of the Fund's assets invested in securities rated in each of the specific rating
categories shown and those that are not rated by the rating agency but deemed by
Advisers to be of comparable credit quality. The information was prepared based
on a dollar weighted average of the Fund's portfolio composition based on
month-end assets for each of the 12 months in the fiscal year ended October 31,
1996. The Appendix to this prospectus includes a description of each rating
category.
AVERAGE WEIGHTED
MOODY'S RATINGS PERCENTAGE OF ASSETS
Aa.............. 1.43%
A............... 4.08%
Baa............. 10.35%
Ba.............. 10.89%
B*.............. 57.27%
Caa............. 0.99%
*22.38% are unrated by the rating agency and have been included in the B rating
category.
FOREIGN SECURITIES. Investment in the shares of foreign issuers requires
consideration of certain factors that are not normally involved in investments
solely in U.S. issuers. Among other things, the financial and economic policies
of some foreign countries in which the Fund may invest are not as stable as in
the U.S. Furthermore, foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to U.S. corporate issuers. There may also be less government
supervision and regulation of foreign securities exchanges, brokers and issuers
than exist in the U.S. Restrictions and controls on investment in the securities
markets of some countries may have an adverse effect on the availability and
costs to the Fund of investments in those countries. In addition, there may be
the possibility of expropriations, foreign withholding taxes, confiscatory
taxation, political, economic or social instability or diplomatic developments
that could affect assets of the Fund invested in issuers in foreign 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 NYSE 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.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in companies in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
smaller size of the markets for these securities and the currently low or
nonexistent volume of trading, that result in a lack of liquidity and in greater
price volatility; (iii) the lack of publicly available information, including
reports of payments of dividends or interest on outstanding securities; (iv)
certain national policies that may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries deemed sensitive
to national interests; (v) foreign taxation; (vi) the absence of developed
structures governing private or foreign investment or allowing for judicial
redress for injury to private property; (vii) restrictions that may make it
difficult or impossible for the Fund to vote proxies, exercise shareholder
rights, pursue legal remedies, and obtain judgments in foreign courts; (viii)
the risk of uninsured loss due to lost, stolen, or counterfeit stock
certificates; and (ix) possible losses through the holding of securities in
domestic and foreign custodial banks and depositories.
INTEREST RATE AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may also cause the value of what the Fund
owns, and thus the Fund's share price, to decline. The value of stock markets
and interest rates throughout the world has increased and decreased in the past.
These changes are unpredictable and may happen again in the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $179 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Edward Jamieson since inception, and Mitchell Cone since
1994.
Edward B. Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Master's degree in accounting and finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts degree
from Bucknell University. He has been with the Franklin Templeton Group since
1987. Mr. Jamieson is a member of several securities industry-related committees
and associations.
Mitchell Cone
Portfolio Manager of Advisers
Mr. Cone is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
economics and sociology from the University of California at Berkeley. He has
been in the securities industry since 1985 and with the Franklin Templeton Group
since 1992. He is a member of several securities industry-related committees and
associations.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 0.62% of the average monthly net assets of the Fund were paid to
Advisers. Total expenses, including fees paid to Advisers, were 1.02% for Class
I and 1.79% for Class II.
PORTFOLIO TRANSACTIONS.Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for activities
primarily intended to sell shares of the class. These expenses may include,
among others, distribution or service fees paid to Securities Dealers or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates, printing prospectuses and reports used for sales purposes, preparing
and distributing sales literature and advertisements, and a prorated portion of
Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and intends to continue to qualify 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 you receive 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 you have 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 you have owned Fund shares and whether you received the
distributions 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, 1996, 19.05% 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 you
until the following January, will be treated as if received by you on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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 you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions received by you from the Fund
and the application of foreign tax laws to these distributions.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Investors Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. The Fund offers two classes
of shares: Franklin Convertible Securities Fund - Class I and Franklin
Convertible Securities Fund - Class II. All shares outstanding before the
offering of Class II shares are considered Class I shares. Additional series and
classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
MINIMUM
INVESTMENTS*
To Open Your Account .... $100
To Add to Your Account... $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $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 None
CLASS II
Under $1,000,000*................... 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above. 9. An Eligible Governmental Authority. Please consult your
legal and investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the Fund
on arbitrage rebate calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the purchase price.
3. Class I purchases by certain retirement plans - up to 1% of the purchase
price.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the purchase price.
A Securities Dealer may only receive one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 3 above will be eligible to receive the Rule
12b-1 fee associated with the purchase starting in the thirteenth calendar month
after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply To your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
Please notify us in writing if you do not want this option to be available on
your account. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer,
if accepted, will be charged $5.00. Some of our funds do not allow investments
by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Beginning on or about May 1, 1997, you may
also exchange Class Z shares of Franklin Mutual Series Fund Inc. for Class I
shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
BY PHONE Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and o If the request is $50,000 or less. Institutional accounts may
sent to us the exceed $50,000 by completing a separate agreement. Call
telephone Institutional Services to receive a copy.
redemption
agreeement o If there are no share certificates issued for the shares you
included with want to sell or you have already returned them to the Fund
this prospectus)
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone
within the last 30 days
THROUGH YOUR DEALER Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income monthly to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS. The code number
is 137 for Class I and 237 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PROSPECTUS & APPLICATION
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
INVESTMENT STRATEGY
INCOME
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes the Franklin Adjustable U.S. Government Securities
Fund (the "Fund"). It contains information you should know before investing in
the Fund. Please keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated March 1, 1997,
which may be amended from time to time. It includes more information about the
Fund's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN or write the Fund at the
address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNLIKE MOST FUNDS THAT INVEST DIRECTLY IN SECURITIES, THE FUND SEEKS TO ACHIEVE
ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN SHARES OF THE U.S.
GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (THE "PORTFOLIO"). THE PORTFOLIO
IS A SERIES OF THE ADJUSTABLE RATE SECURITIES PORTFOLIOS. ITS INVESTMENT
OBJECTIVE IS THE SAME AS THE FUND'S.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary................................................. 2
Financial Highlights............................................ 4
How does the Fund Invest its Assets?............................ 6
What are the Fund's Potential Risks?............................ 13
Who Administers the Fund?....................................... 14
How does the Fund Measure Performance?.......................... 16
How Taxation Affects the Fund and its Shareholders.............. 16
How is the Trust Organized?..................................... 18
ABOUT YOUR ACCOUNT
How Do I Buy Shares?............................................ 18
May I Exchange Shares for Shares of Another Fund?............... 23
How Do I Sell Shares?........................................... 25
What Distributions Might I Receive from the Fund?............... 28
Transaction Procedures and Special Requirements................. 29
Services to Help You Manage Your Account........................ 33
What If I Have Questions About My Account?...................... 35
GLOSSARY
Useful Terms and Definitions.................................... 36
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses, including its proportionate
share of the Portfolio's expenses, for the fiscal year ended October 31, 1996.
The Fund's actual expenses may vary.
A. 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*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management and Administration Fees 0.50%**
Rule 12b-1 Fees 0.22%***
Other Expenses of the Fund and the Portfolio 0.14%
Total Fund Operating Expenses 0.86%**
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$31**** $49 $69 $126
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in its Net Asset Value or dividends and are not directly charged to your
account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees and make certain payments to reduce the Fund's and the Portfolio's
expenses. With this reduction, management fees of the Portfolio were 0.23% and
administration fees of the Fund were 0.10%. Total Fund operating expenses were
0.69%.
***These fees may not exceed 0.25%. 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 charge permitted under the
NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
The Board considered whether the total fees and expenses of the Fund and the
Portfolio would be more or less than if the Fund invested directly in the types
of securities held by the Portfolio. By investing all of its assets in shares of
the Portfolio, the Fund, other investment companies and institutional investors
are able to pool their assets. This may result in a variety of operating
economies. Accordingly, the Board concluded that the total expenses of the Fund
and the Portfolio were expected to be lower than if the Fund invested directly
in various types of mortgage-backed securities. Of course, there is no guarantee
that asset growth and lower expenses will be achieved. Advisers, however, has
agreed in advance to limit expenses so that they will not be higher than if the
Fund invested directly in the types of securities held by the Portfolio.
Advisers may end this arrangement at any time upon notice to the Board. For more
information on the fees and expenses of the Fund and the Portfolio, please see
"Who Administers the Fund?"
Financial Highlights
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent six periods appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended October 31, October 31, Year Ended January 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net Asset Value
at Beginning of Period $9.34 $9.20 $9.77 $9.86 $9.98 $9.99 $10.05 $10.07 $10.17
--------------------------------------------------------------------------------------------------
Net Investment Income 0.56 0.54 0.35 0.28 0.51 0.74 0.88 0.94 0.82
Net Realized &
Unrealized Gains
(Losses) on Securities 0.032 0.136 (0.606) (0.086) (0.105) 0.027 0.066 0.034 (0.229)
---------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.592 0.676 (0.256) 0.194 0.405 0.767 0.946 0.974 0.591
--------------------------------------------------------------------------------------------------
Distributions From
Net Investment Income (0.562) (0.536) (0.314) (0.284) (0.522) (0.777) (1.006) (0.994) (0.691)
Distributions From
Capital Gains - - - - (0.003) - - - -
----------------------------------------------------------------------------------------------
Total Distributions (0.562) (0.536) (0.314) (0.284) (0.525) (0.777) (1.006) (0.994) (0.691)
----------------------------------------------------------------------------------------------------
Net Asset Value
at End of Period $9.37 $9.34 $9.20 $9.77 $9.86 $9.98 $9.99 $10.05 $10.07
==================================================================================================
Total Return** 6.54% 7.57% (2.65)% 1.99% 4.16% 7.96% 9.91% 10.16% 5.99%
RATIOS/SUPPLEMENTAL DATA
Net Assets
at End of Period (in 000's)$397,078 $509,371 $700,617 $1,813,504 $2,971,424 $3,513,415 $1,173,486 $82,257 $45,250
Ratio of Expenses
to Average Net Assets+ 0.69%2 0.61%2 0.42%2 0.65%2* 0.66%2 0.68%2 0.30% 0.39% 0.44%
Ratio of Net
Investment Income
to Average Net Assets 5.87% 5.76% 3.67% 3.92%* 5.10% 7.10% 8.23% 9.03% 7.92%
Portfolio Turnover Rate 23.52% 17.81% 5.99% 6.97% 30.36% 30.89% 96.50% 76.32% 48.39%
</TABLE>
1For the nine months ended October 31, resulting from a change in fiscal year
end from January 31.
2Includes the Fund's share of the Portfolio's allocated expenses.
*Annualized.
**Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains at Net Asset Value. Prior to May 1, 1994, dividends
were reinvested at the maximum Offering Price.
+During the periods indicated, Advisers agreed in advance to waive a portion of
its fees and make payments of other expenses incurred by the Fund and the
Portfolio. Had such action not been taken, the ratio of operating expenses to
average net assets would have been as follows:
1989 .96
1990 .87
1991 .82
1992 .892
1993 .802
19931 .792*
1994 .822
1995 .862
1996 .862
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a high level of current income,
consistent with lower volatility of principal. The Fund seeks to achieve its
investment objective by investing all of its assets in the Portfolio. The
investment policies of the Fund are substantially similar to the policies and
restrictions of the Portfolio except that, in all cases, the Fund may pursue its
policies by investing in an open-end management investment company with the same
investment objective and substantially similar policies and restrictions as the
Fund. Any additional exceptions are noted below. The Fund buys shares of the
Portfolio at Net Asset Value. An investment in the Fund is an indirect
investment in the Portfolio. The objective of the Fund and the Portfolio is
fundamental and may not be changed without shareholder approval. Of course,
there is no assurance that the Fund's objective will be achieved.
THE FUND'S MASTER/FEEDER FUND STRUCTURE
An investment in the Fund may be subject to certain risks due to the Fund's
structure. These risks include the potential that if other future shareholders
in the Portfolio sell their shares, the Fund's expenses may increase or the
economies of scale that 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 also have effective
voting control over the operation of the Portfolio. Furthermore, if 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 investment objective and policies. If the Board considers
it to be in the best interest of the Fund, the Fund may withdraw its investment
in the Portfolio at any time. In that event, the Board would consider what
action to take, including the investment of all of the assets of the Fund in
another pooled investment entity with the same investment objective and
substantially similar policies as the Fund or the hiring of an investment
advisor to manage the Fund's investments. Either circumstance may cause an
increase in Fund expenses.
The Fund's structure is a relatively new format that often results in certain
operational and other complexities. The Franklin organization was one of the
first mutual fund complexes in the country to implement this structure, and the
Board does not believe the additional complexities outweigh the potential
benefits to be gained by shareholders.
The Fund's investment of all of its assets in the Portfolio was previously
approved by shareholders of the Fund. Whenever the Fund, as an investor in the
Portfolio, is asked to vote on a matter relating to the Portfolio, the Fund will
hold a meeting of Fund shareholders and will cast its votes in the same
proportion as the Fund's shareholders have voted.
The Franklin Templeton Funds have one other fund, designed for institutional
investors only, that invests in the Portfolio. In the future, other funds may be
created that may likewise invest in the Portfolio or existing funds may be
restructured so that they may invest in the Portfolio. If requested, we will
forward additional information to you about other funds through which you may
invest in the Portfolio. If you would like to receive this information, please
call Fund Information.
The Portfolio is a diversified series of the Adjustable Rate Securities
Portfolios, an open-end management investment company. The Adjustable Rate
Securities Portfolios was organized as a Delaware business trust on February 15,
1991, and is registered with the SEC under the 1940 Act. The Adjustable Rate
Securities Portfolios currently issues shares in two separate series. In the
future, additional series may be added by the Board of Trustees of the
Adjustable Rate Securities Portfolios.
For information on the Fund's administrator and its expenses, please see "Who
Administers the Fund?"
TYPES OF SECURITIES IN WHICH THE PORTFOLIO MAY INVEST
The Portfolio will seek to achieve its investment objective by investing 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") that have interest rates that reset at
periodic intervals. All mortgage securities that the Portfolio invests in, will
be issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Portfolio may also invest 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 U.S. government
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 Federal Deposit Insurance Corporation ("FDIC"). The
Portfolio's investment in time deposits will not exceed 10% of its total assets.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in U.S. government securities, CDs of banks having total assets in excess
of $5 billion and repurchase agreements.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional mortgage securities,
are interests in pools of mortgage loans. Most mortgage securities are
pass-through securities, which means that they provide investors with payments
consisting of both principal and interest as mortgages in the underlying
mortgage pool are paid off by the borrower. The dominant issuers or guarantors
of mortgage securities today are GNMA, FNMA and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage bankers,
commercial banks and savings and loan associations. FNMA and FHLMC issue
mortgage securities from pools of conventional and federally insured and/or
guaranteed residential mortgages obtained from various entities, including
savings and loan associations, savings banks, commercial banks, credit unions
and mortgage bankers.
The adjustable interest rate feature of the mortgages underlying the mortgage
securities in which the Portfolio invests generally will act as a buffer to
reduce sharp changes in the Portfolio's Net Asset Value in response to normal
interest rate fluctuations. As the interest rates on the mortgages underlying
the Portfolio's investments are reset periodically, yields of portfolio
securities will gradually align themselves to reflect changes in market rates so
that the market value of the 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 Fund shares 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 held by the Portfolio will generally
have annual reset limits or caps of 100 to 200 basis points, short-term
fluctuations in interest rates above these levels could cause these mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
securities.
Unlike fixed-rate mortgages, that 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 mortgage securities held
as investments by the Portfolio to exceed the maximum allowable annual or
lifetime reset limits (or "cap rates") for a particular mortgage. Also, the
Portfolio's Net Asset Value could vary to the extent that current yields on
mortgage-backed securities are different than market yields during interim
periods between coupon reset dates.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Fund. Further, because of
this feature, the value of ARMS are unlikely to rise during periods of declining
interest rates to the same extent as fixed-rate instruments. As with other
mortgage backed securities, interest rate declines may result in accelerated
prepayment of mortgages and the proceeds from such prepayments must be
reinvested at lower prevailing interest rates.
One additional difference between ARMS and fixed-rate mortgages is that for
certain types of ARMS, the rate of amortization of principal, as well as
interest payments, can and does change in accordance with movements in a
particular, pre-specified, published interest rate index. The amount of interest
due to an ARMS holder is calculated by adding a specified additional amount, the
"margin," to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. It is these special characteristics that are unique to adjustable rate
mortgages that the Fund believes make them attractive investments in seeking to
accomplish the Fund's investment objective.
Many mortgage securities issued or guaranteed by GNMA, FHLMC or FNMA
("Certificates") are called pass-through Certificates because a pro rata share
of both regular interest and principal payments (less GNMA's, FHLMC's or FNMA's
fees and any applicable loan servicing fees), as well as unscheduled early
prepayments on the underlying mortgage pool, are passed through monthly to the
holder of the Certificate (i.e., the Portfolio). The principal and interest on
GNMA securities are guaranteed by GNMA which guarantee is backed by the full
faith and credit of the U.S. government. FNMA guarantees full and timely payment
of all interest and principal, while FHLMC guarantees timely payment of interest
and ultimate collection of principal. Mortgage securities issued or guaranteed
by FNMA and FHLMC are not backed by the full faith and credit of the U.S.
government; however, they are generally considered to offer minimal credit
risks. The yields provided by these mortgage securities have historically
exceeded the yields on other types of U.S. government securities with comparable
maturities in large measure due to the prepayment risk. See "What Are the Fund's
Potential Risks? - Mortgage Securities" in this Prospectus.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). The Portfolio may 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 ARMS and CMOs in which the Portfolio
primarily invests generally are readjusted at intervals of one year or less to
an increment over some predetermined interest rate index, although some may have
intervals as long as 5 years. There are three main categories of indices: those
based on the London Interbank Offered Rate (LIBOR); those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one, three- and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 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 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 ARMS and CMOs in
which the Portfolio invests will frequently have caps and floors that 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.
OTHER INVESTMENT POLICIES OF THE PORTFOLIO
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase transactions in
which the Portfolio buys 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 that are deemed
creditworthy by Advisers. 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 bank
approved by the Portfolio's Board of Trustees and will be held pursuant to a
written agreement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy U.S.
government obligations on a "when-issued" or "delayed delivery" basis. These
transactions are arrangements under which the Portfolio buys securities with
payment and delivery scheduled for a future time, generally within 30 to 60
days. The price is subject to market fluctuation, and the value at delivery may
be more or less than the purchase price. Although the Portfolio will generally
buy U.S. government securities on a when-issued basis with the intention of
acquiring the securities, it may sell the 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 bank,
cash or high-grade marketable securities having an aggregate value equal to the
amount of its purchase commitments until payment is made. To the extent the
Portfolio engages in when-issued and delayed delivery transactions, it will do
so only for the purpose of acquiring portfolio securities consistent with the
Portfolio's investment objective and policies, and not for the purpose of
investment leverage. In when-issued and delayed delivery transactions, the
Portfolio relies on the seller to complete the transaction. The other party's
failure may cause the Portfolio to miss a price or yield considered
advantageous. Securities purchased on a when-issued or delayed delivery basis do
not generally earn interest until their scheduled delivery date. The Portfolio
is not subject to any percentage limit on the amount of its assets that it may
invest 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. The Portfolio's policy is not to invest more than 10% of
its net assets, at the time of purchase, in illiquid securities. Illiquid
securities are generally securities that cannot be sold within seven days in the
normal course of business at approximately the amount at which the Portfolio has
valued them. They include, among others, repurchase agreements and time and
savings deposits of more than seven days duration.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund and the Portfolio have a number of
additional investment restrictions that limit their activities to some extent.
Some of these restrictions may only be changed with shareholder approval. For a
list of these restrictions and more information about the Fund's and the
Portfolio's investment policies, please see "How does the Fund Invest its
Assets?" and "Investment Restrictions" in the SAI.
THE ADVANTAGES OF INVESTING IN THE FUND
The Fund enables you to invest easily in mortgage securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities by allowing
an initial investment of as low as $100. Any 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 the mortgage
securities. The Fund believes that by investing in the Portfolio, which in turn
invests primarily in mortgage securities that 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. Please see "How are Fund Shares Valued?" in
the SAI. Principal payments received on the Portfolio's mortgage securities will
be reinvested by the Portfolio in other securities. These 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 since you may redeem shares of the Fund at the current Net Asset Value
at any time in accordance with procedures described under "How Do I Sell
Shares?" 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 Distributors on arbitrage rebate calculations.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. Since the Fund invests its assets in shares of the
Portfolio, as the value of the securities owned by the Portfolio fluctuates, the
Portfolio's Net Asset Value per share, and thus the Fund's Net Asset Value per
share, will also fluctuate.
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 that 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.
INTEREST RATE RISK. Changes in interest rates will affect the value of the
Portfolio's and thus the Fund's holdings and affect both the Portfolio's and
Fund's share prices. Rising interest rates, which often occur during times of
inflation or a growing economy, are likely to have a negative effect on the
value of the Portfolio's and the Fund's shares. Interest rates have increased
and decreased in the past. These changes are unpredictable and may happen again
in the future.
WHO ADMINISTERS THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
The Board, with approval of all disinterested trustees and interested Board
members, has adopted written procedures designed to deal with potential
conflicts of interest that may arise from the Trust and the Portfolio having
substantially the same boards. These procedures call for an annual review of the
Trust's relationship with the Portfolio. If a conflict exists, the boards may
take action which may include the establishment of a new board. The Board has
determined that there are no conflicts of interest at the present time. For more
information, please see "Officers and Trustees" in the SAI.
INVESTMENT MANAGER AND ADMINISTRATOR. Advisers manages the Portfolio's assets
and makes its investment decisions. Advisers also performs similar services for
other funds. It is wholly owned by Resources, a publicly owned company engaged
in the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $179 billion in assets.
Advisers is also the administrator of the Fund. Please see "Investment
Management and Other Services" and "Miscellaneous Information" in the SAI for
information on securities transactions and a summary of the Fund's Code of
Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Portfolio in which the Fund invests is: Roger Bayston since 1991, Anthony Coffey
since 1991, and Jack Lemein since inception.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since earning his MBA degree in 1991.
T. Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned his
Bachelor of Arts degree in applied mathematics and economics from Harvard
University. Mr. Coffey has been with the Franklin Templeton Group since 1989. He
is a member of several securities industry-related associations.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
MANAGEMENT FEES. You will bear a portion of the Portfolio's operating expenses,
including its management fees, to the extent that the Fund, as a shareholder of
the Portfolio, bears these expenses. The portion of the Portfolio's expenses
borne by the Fund depends on the Fund's proportionate share of the Portfolio's
net assets.
During the fiscal year ended October 31, 1996, the Fund's proportionate share of
the Portfolio's management fees and the Fund's administration fees before any
advance waiver, totaled 0.40% and 0.10%, respectively, of the average daily net
assets of the Fund. Total operating expenses, including fees paid to Advisers
before any advance waiver, totaled 0.86%. Under an agreement by Advisers to
limit its fees and to make certain payments to reduce expenses so that the
Fund's and the Portfolio's total operating expenses are not more than if the
Fund invested directly in the securities held by the Portfolio, the Fund paid a
proportionate share of the Portfolio's management fees and administration fees
totaling 0.23% and 0.10%. Total expenses of the Fund were 0.69%. Advisers may
end this arrangement at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Advisers provides certain administrative services and
facilities for the Fund. Please see "Investment Management and Other Services"
in the SAI for more information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.25% per year of the Fund's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. During the first year after certain
purchases made without a sales charge, Distributors may keep the Rule 12b-1 fees
associated with the purchase. For more information, please see "The Fund's
Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and intends to continue to qualify 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 that you receive 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 you have 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 you have 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,
1996, qualified for the corporate dividends-received deduction and it is not
expected that distributions for the current fiscal year will so qualify.
Pursuant to the Code, certain distributions which are declared in October,
November or December, but which, for operational reasons, may not be paid to you
until the following January, will be treated as if received by you on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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.
You should consult with your tax advisor concerning the tax rules applicable to
the redemption and exchange of Fund shares. The Fund will inform you of the
source of your dividends and distributions at the time they are paid and will
promptly after the close of each calendar year advise you 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 the fiscal
year ended October 31, 1996 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. You should consult with
your own tax advisor with respect to the applicability of state and local
intangible property or income taxes to your shares of the Fund and distributions
and redemption proceeds received from the Fund.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding taxes to distributions received by you from the Fund and the
application of foreign tax laws to these distributions.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Investors Securities Trust ("the
Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. Until March 13, 1990, the
Fund was known as the Franklin Adjustable Rate Mortgage Fund. Shares of each
series of the Trust have equal and exclusive rights to dividends and
distributions declared by that series and the net assets of the series in the
event of liquidation or dissolution. Shares of the Fund are considered Class I
shares for redemption, exchange and other purposes. Additional series and
classes of shares may be offered in the future.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that affect
the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
- - If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE*
Under $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 None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares. The Fund's sales charges will not apply if you are buying shares
with money from the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases"
above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. A Securities
Dealer may only receive one of these payments for each qualifying purchase.
Securities Dealers who receive payments in connection with investments described
in paragraphs 1 or 2 below will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase. The payments are subject to the sole discretion of Distributors, and
are paid by Distributors or one of its affiliates and not by the Fund or its
shareholders.
1. Purchases of $1 million or more - Securities Dealers may receive up to 0.75%
of the purchase price.
2. Purchases made under waiver category 8 above - Securities Dealers may receive
up to 1% of the purchase price.
3. Purchases made under waiver categories 6, 9 and 10 above - Securities Dealers
may receive up to 0.25% of the purchase price.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to apply
to your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON
YOUR ACCOUNT. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Beginning on or about May 1, 1997, you may also exchange
Class Z shares of Franklin Mutual Series Fund Inc. for shares of the Fund at Net
Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
BY PHONE Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and o If the request is $50,000 or less. Institutional accounts
sent to us the may exceed $50,000 by completing a separate agreement.
telephone Call Institutional Services to receive a copy.
redemption
agreement o If there are no share certificates issued for the shares
included with you want to sell or you have already returned them to
this prospectus) the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 30 days
THROUGH YOUR DEALER Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income monthly to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value and Offering
Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's and the Portfolio's
assets are valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS. The Fund's code number is
138.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund,
Distributors and Advisers are also located at this address. You may also contact
us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Portfolio's investment manager and the
Fund's administrator
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 2.25% sales charge.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN EQUITY INCOME FUND
INVESTMENT STRATEGY
GROWTH & INCOME
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes the Franklin Equity Income Fund (the "Fund"). It
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated March 1, 1997,
which may be amended from time to time. It includes more information about the
Fund's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN or write the Fund at the
address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN EQUITY INCOME FUND
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ..................................... 2
Financial Highlights ................................ 3
How does the Fund Invest its Assets?................. 6
What are the Fund's Potential Risks? ................ 11
Who Manages the Fund?................................ 13
How does the Fund Measure Performance?............... 15
How Taxation Affects the Fund and its Shareholders... 16
How is the Trust Organized?.......................... 17
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ................................ 17
May I Exchange Shares for Shares of Another Fund? ... 23
How Do I Sell Shares?................................ 27
What Distributions Might I Receive from the Fund?.... 29
Transaction Procedures and Special Requirements...... 30
Services to Help You Manage Your Account............. 35
What If I Have Questions About My Account?........... 37
GLOSSARY
Useful Terms and Definitions ........................ 37
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended October 31, 1996. The Fund's actual expenses may vary.
CLASS I CLASS II
A. SHAREHOLDER TRANSACTION EXPENSES+
MAXIMUM SALES CHARGE
(as a percentage of Offering Price). 4.50% 1.99%
Paid at time of purchase........... 4.50%++ 1.00%+++
Paid at redemption++++............. None 0.99%
Exchange Fee (per transaction)...... $5.00* $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees..................... 0.57% 0.57%
Rule 12b-1 Fees..................... 0.25%** 1.00%**
Other Expenses...................... 0.16% 0.16%
-------------
Total Fund Operating Expenses....... 0.98% 1.73%
=============
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I............... $55*** $75 $ 97 $160
Class II.............. $37 $64 $103 $212
For the same Class II investment, you would pay projected expenses of $27 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class I
shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**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 charge permitted under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent six periods appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
Year Ended October 31, Year Ended January 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS I SHARES: 1996 1995 1994 19931 1993 1992 1991 1990 19892
- -------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance+
Net Asset Value
at Beginning of Period $15.19 $14.14 $14.91 $13.46 $12.31 $10.64 $11.53 $11.00 $10.00
--------------------------------------------------------------------------------------------------
Net Investment Income 0.64 .63 .62 .60 .66 .42 .72 .75 .56
Net Realized &
Unrealized Gains
(Losses) on Securities 1.628 1.272 (0.358) 1.435 1.307 1.967 (.803) .527 .887
-------------------------------------------------------------------------------------------------
Total From
Investment Operations 2.268 1.902 .262 2.035 1.967 2.387 (.083) 1.277 1.447
Distributions From
Net Investment Income (.649) (.609) (.725) (.495) (.682) (.660) (.736) (.655) (.370)
Distributions
From Capital Gains (.399) (.243) (.307) (.090) (.135) (.057) (.071) (.092) (.077)
--------------------------------------------------------------------------------------------------
Total Distributions (1.048) (.852) (1.032) (.585) (.817) (.717) (.807) (.747) (.447)
---------------------------------------------------------------------------------------------------
Net Asset
Value at End of Period $16.41 $15.19 $14.14 $14.91 $13.46 $12.31 $10.64 $11.53 $11.00
==================================================================================================
Total Return++ 15.39% 14.10% 1.83% 15.27% 16.23% 22.76% (.92%) 11.43% 14.61%
Ratios/Supplemental Data:
Net Assets
at End of
Period (in 000's) $246,952 $168,897 $92,763 $42,177 $26,092 $16,144 $10,808 $7,221 $2,527
Ratio of Expenses
to Average Net Assets* 0.98% 1.00% .77% .25%** .25% .25% .18% -% -%
Ratio of Net Investment
Income to Average
Net Assets 4.11% 4.44% 4.53% 5.86%** 5.18% 5.77% 6.60% 6.23% 5.78%**
Portfolio Turnover Rate 24.15% 27.86% 39.51% 19.33% 31.05% 40.59% 26.99% 33.11% 11.34%
Average Commission Rate***0.0514 - - - - - - - -
</TABLE>
YEAR ENDED OCTOBER 31,
CLASS II SHARES+++: 1996 19953
Per Share Operating Performance+
Net Asset Value
at Beginning of Period $15.19 $15.38
Net Investment Income 0.52 .05
Net Realized &
Unrealized Gains
(Losses) on Securities 1.627 (.193)
Total From
Investment Operations 2.147 (.143)
Distributions From
Net Investment Income (0.558) (.047)
Distributions
From Capital Gains (0.399) -
Total Distributions (0.957) (.047)
Net Asset
Value at End of Period $16.38 $15.19
Total Return++ 14.53% (.93)%
Ratios/Supplemental Data:
Net Assets at
End of Period (in 000's) $18,227 $386
Ratio of Expenses
to Average Net Assets* 1.73% 1.99%**
Ratio of Net Investment
Income to Average
Net Assets 3.33% 3.57%**
Portfolio Turnover Rate 24.15% 27.86%
Average Commission Rate*** 0.0514 -
1For the nine months ended October 31, 1993 resulting from a change in fiscal
year end from January 31.
2For the period March 15, 1988 (effective date of registration) to January 31,
1989.
3For the period October 2, 1995 (effective date) to October 31, 1995.
+Selected data for a share of beneficial interest outstanding throughout the
period.
++Total return measures the change in value of an investment over the periods
indicated and is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge, and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value. Prior to May 1, 1994,
dividends were reinvested at the maximum Offering Price.
+++Ratios have been calculated using daily average net assets during the period.
*During the periods indicated, Advisers agreed in advance to waive a portion of
its management fees and to make certain payments to reduce expenses of the Fund.
Had such action not been taken, the ratios of operating expenses to average net
assets would have been as follows:
Class I
19892 0.73%**
1990 0.83
1991 0.83
1992 0.84
1993 0.81
19931 0.87**
1994 0.95
1995 1.02
**Annualized.
***Represents the average commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to maximize 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. Of course, there is no assurance that
the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund pursues its investment objective by investing at least 65% of its net
assets (except when maintaining a temporary defensive position) in a broadly
diversified portfolio of common and preferred stocks, including convertibles,
offering current dividend yields above the average of the market defined by the
Standard & Poor's 500(R) Index. The Fund may invest up to 35% of its net assets
in other securities which, in the aggregate, are considered to be consistent
with the Fund's investment objective. Other investments may include fixed-income
securities convertible into common and preferred stocks, covered call options,
put options, U.S. government securities, securities of foreign issuers,
corporate bonds, high grade commercial paper, bankers' acceptances and other
short-term instruments.
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's 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
as defined by the Standard & Poor's 500 Index. This results in a unique relative
yield range for each company that in turn provides a discipline for determining
whether a stock is attractive for purchase or sale.
Because high relative dividend yield as defined above is frequently accompanied
by a lower stock price, the Fund seeks to buy a stock when its relative dividend
yield is high. Conversely, it seeks to sell a stock when its dividend 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 relatively high
dividend 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 that 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 current approach used by the Fund to attempt to achieve its objective is not
a fundamental policy of the Fund and is subject to change at the discretion of
the Board and without prior shareholder approval.
CONVERTIBLE SECURITIES. Convertible securities are, in general, debt obligations
or preferred stocks that may be converted within a specified period of time into
a certain amount of common stock of the same or a different issuer. A
convertible security provides a fixed-income stream and the opportunity, through
its conversion feature, to participate in the capital appreciation resulting
from a market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
common stock, the value of a convertible security tends to increase as the
market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("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. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture.
There may be additional types of convertible securities not specifically
referred to in this discussion which may be similar to those described above in
which the Fund may invest, consistent with its objective and policies.
Presently, the Fund does not intend to invest more than 15% of its assets in
convertible securities. Please refer to the SAI for more information about these
securities.
FOREIGN SECURITIES. The Fund may invest in foreign securities, generally by
purchasing those traded in the U.S. or by purchasing American Depositary
Receipts ("ADRs"), that 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 also buy securities of foreign issuers directly
in foreign markets, and may invest up to 30% of its net assets in foreign
securities not publicly traded in the U.S. Foreign securities have risks that
U.S. securities do not have. For more information about foreign securities and
their risks, please see "What are the Fund's Potential Risks? - Foreign
Securities" in this Prospectus and "How does the Fund Invest its Assets" in the
SAI.
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 owns, that are listed for trading on a national
securities exchange, and it may also buy listed call options. The Fund may also
buy 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.
Options are generally considered "derivative securities." For more information
on options, please see "How does the Fund Invest its Assets?" in the SAI.
DEBT SECURITIES. The Fund may invest up to a maximum of 35% of its net assets in
debt securities. In seeking securities that meet its investment objective, the
Fund will buy only debt securities which are rated B or better by S&P or Ba or
better by Moody's or debt securities that are unrated but that are judged to be
of comparable quality. Instruments rated B by S&P or Ba by Moody's generally
lack characteristics of desirable investments and are judged to have
predominantly speculative elements. The Fund does not intend to invest more than
5% of its assets in fixed-income debt securities rated below Baa by Moody's or
BBB by S&P. Further details on these ratings are included in the Appendix to the
SAI.
Rather than relying principally on the ratings assigned by rating services,
however, the investment analysis of debt securities being considered for the
Fund's portfolio may also include, among other things, consideration of relative
values based on such factors as anticipated cash flow, interest coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements and the issuer's changing
financial condition and public recognition thereof.
REAL ESTATE INVESTMENT TRUSTS ("REITS"). The Fund may invest up to 10% of its
assets in REITs that are listed on a securities exchange or traded
over-the-counter and meet the Fund's investment objective. In order to qualify
as a REIT, a company must derive at least 75% of its gross income from real
estate sources (rents, mortgage interest, gains from the sale of real estate
assets), and at least 95% from real estate sources, plus dividends, interest and
gains from the sale of securities. Real property, mortgage loans, cash and
certain securities must comprise 75% of a company's assets. In order to qualify
as a REIT, a company must also make distributions to shareholders aggregating
annually at least 95% of its REIT taxable income.
U.S. GOVERNMENT SECURITIES. 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.
Other Investment Policies of the Fund
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys 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 that are deemed creditworthy by Advisers. 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 bank approved by the Board and will be held
pursuant to a written agreement.
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
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 100% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank 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%. This
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. The Fund may engage in security loan arrangements
with the primary objective of increasing the Fund's income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. 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. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
FOREIGN SECURITIES. Investment in securities of foreign issuers involve
significant risks including possible losses that are not typically associated
with investments in securities of U.S. issuers. Among other things, the
financial and economic policies of some foreign countries in which the Fund may
invest are not as stable as in the U.S. Furthermore, foreign issuers are not
generally subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to U.S. corporate issuers. There may
also be less government supervision and regulation of foreign securities
exchanges, brokers and issuers than exist in the U.S. Restrictions and controls
on investment in the securities markets of some countries may have an adverse
effect on the availability and costs to the Fund of investments in those
countries. In addition, there may be the possibility of expropriations, foreign
withholding taxes, confiscatory taxation, political, economic or social
instability or diplomatic developments that could affect assets of the Fund
invested in issuers in foreign 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 NYSE 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. Please
see the SAI for more information regarding these securities.
DEBT SECURITIES. Debt securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to factors such as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). Advisers considers both
credit risk and market risk in making investment decisions as to corporate debt
obligations for the Fund. Debt obligations in which the Fund may invest will
tend to decrease in value when prevailing interest rates rise and increase in
value when prevailing interest rates fall. Generally, long-term debt obligations
are more sensitive to interest rate fluctuations than short-term obligations.
Because investments in debt obligations are interest rate sensitive, the Fund's
performance may be affected by Advisers' ability to anticipate and respond to
fluctuations in market interest rates, to the extent of the Fund's investment in
debt obligations.
INTEREST RATE, CURRENCY, AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable and may happen again in the future.
REITS. An investment in REITs includes the possibility of a decline in the value
of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants and increases in interest rates. The value of securities
of companies that service the real estate industry will also be affected by
these risks.
In addition, equity REITs are affected by changes in the value of the underlying
property owned by the trusts, while mortgage REITs are affected by the quality
of the properties to which they have extended credit. Equity and mortgage REITs
are dependent upon the REIT's management skill. REIT's may not be diversified
and are subject to the risks of financing projects.
CONVERTIBLE SECURITIES. An investment in an enhanced convertible security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the 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 liquid securities, though there can be no assurances that this will
be achieved.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $179 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Frank Felicelli and Howard M. McEldowney since its
inception and Douglas Barton since July 1991.
Frank Felicelli
Vice President of Advisers
Mr. Felicelli is a Chartered Financial Analyst and has a master of business
administration degree from Golden Gate University. He earned a bachelor of arts
degree in economics from the University of Illinois. He has been with the
Franklin Templeton Group since 1986. He is a member of several securities
industry-related associations.
Douglas Barton
Vice President of Advisers
Mr. Barton is a Chartered Financial Analyst and holds a master of business
administration degree from California State University in Hayward and a bachelor
of science degree from California State University in Chico. Mr. Barton joined
the Franklin Templeton Group in July 1988.
Howard M. McEldowney
Portfolio Manager of Advisers
Mr. McEldowney holds a masters of business administration degree from Columbia
University School of Business and a bachelor of arts degree from Harvard
University. Mr. McEldowney has been in the securities industry since 1964 and
with the Franklin Templeton Group since April 1984.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 0.57% of the average monthly net assets of the Fund were paid to
Advisers. Total expenses, including fees paid to Advisers, were 0.98% for Class
I and 1.73% for Class II.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies, it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for activities
primarily intended to sell shares of the class. These expenses may include,
among others, distribution or service fees paid to Securities Dealers or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates, printing prospectuses and reports used for sales purposes, preparing
and distributing sales literature and advertisements, and a prorated portion of
Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield and
current distribution rate. Performance figures are usually calculated using the
maximum sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and intends to continue to qualify 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 you receive 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 you have 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 you have owned Fund shares and whether you receive the
distributions 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, 1996, 68.66% 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 you
until the following January, will be treated as if you received them on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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 you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person, for purposes of federal income taxation, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions you receive from the Fund and
the application of foreign tax laws to these distributions.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Investors Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. The Fund offers two classes
of shares: Franklin Equity Income Fund - Class I and Franklin Equity Income Fund
- - Class II. All shares outstanding before the offering of Class II shares are
considered Class I shares. Additional series and classes of shares may be
offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE*
CLASS I
Under $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 None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
- IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell, and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal funds
received by the close of business on the next business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the purchase price.
3. Class I purchases by certain retirement plans - up to 1% of the purchase
price.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the purchase price.
A Securities Dealer may only receive one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 3 above will be eligible to receive the Rule
12b-1 fee associated with the purchase starting in the thirteenth calendar month
after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
PLEASE NOTIFY US IN WRITING
IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT(S). Additional
procedures may apply. Please see "Transaction Procedures and Special
Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Beginning on or about May 1, 1997, you may
also exchange Class Z shares of Franklin Mutual Series Fund Inc. for Class I
shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other additional requirements.
BY PHONE Call Shareholder Services
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may exceed $50,000
by completing a separate agreement. Call Institutional Services to receive a
copy.
o If there are no share certificates issued for the shares you want to sell or
you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan account
o Unless the address on your account was changed by phone within the last 30
days
THROUGH YOUR DEALER Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million in Class I shares, you can withdraw up to $120,000 annually through a
systematic withdrawal plan free of charge. Likewise, if you maintain an annual
balance of $10,000 in Class II shares, $1,200 may be withdrawn annually free of
charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income monthly to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month. Capital gains, if any, may
be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS. The code number
is 139 for Class I and 239 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund.
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
INVESTMENT STRATEGY
INCOME
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes the Franklin Adjustable Rate Securities Fund (the
"Fund"). It contains information you should know before investing in the Fund.
Please keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated March 1, 1997,
which may be amended from time to time. It includes more information about the
Fund's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN or write the Fund at the
address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNLIKE MOST FUNDS THAT INVEST DIRECTLY IN SECURITIES, THE FUND SEEKS TO ACHIEVE
ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN SHARES OF THE
ADJUSTABLE RATE SECURITIES PORTFOLIO (THE "PORTFOLIO"). THE PORTFOLIO IS A
SERIES OF THE ADJUSTABLE RATE SECURITIES PORTFOLIOS. ITS INVESTMENT OBJECTIVE IS
THE SAME AS THE FUND'S.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary.................................................. 2
Financial Highlights ............................................ 3
How does the Fund Invest its Assets?............................. 4
What are the Fund's Potential Risks?............................. 16
Who Administers the Fund?........................................ 19
How does the Fund Measure Performance?........................... 21
How Taxation Affects the Fund and its Shareholders .............. 21
How is the Trust Organized?...................................... 23
ABOUT YOUR ACCOUNT
How Do I Buy Shares?............................................. 23
May I Exchange Shares for Shares of Another Fund?................ 28
How Do I Sell Shares?............................................ 30
What Distributions Might I Receive from the Fund?................ 32
Transaction Procedures and Special Requirements.................. 33
Services to Help You Manage Your Account......................... 37
What If I Have Questions About My Account?....................... 40
GLOSSARY
Useful Terms and Definitions .................................... 40
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Adjustable Rate Securities Fund
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses, including its proportionate
share of the Portfolio's expenses, for the fiscal year ended October 31, 1996.
The Fund's actual expenses may vary.
A. 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*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management and Administration Fees 0.50%**
Rule 12b-1 Fees 0.22%***
Other Expenses of the Fund and the Portfolio 0.40%
Total Fund Operating Expenses 1.12%**
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are the
projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$29**** $43 $58 $102
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in its Net Asset Value or dividends and are not directly charged to your
account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1 million
or more if you sell the shares within one year. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees and make certain payments to reduce the Fund's and the Portfolio's
expenses. With this reduction, management fees of the Portfolio were 0.18% and
administration fees of the Fund were 0.10%. Total Fund operating expenses were
0.90%.
*** These fees may not exceed 0.25%. 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 charge permitted under the
NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
The Board considered whether the total fees and expenses of the Fund and the
Portfolio would be more or less than if the Fund invested directly in the types
of securities held by the Portfolio. By investing all of its assets in shares of
the Portfolio, the Fund and other investment companies and institutional
investors are able to pool their assets. This may result in a variety of
operating economies. Accordingly, the Board concluded that the total expenses of
the Fund and the Portfolio were expected to be lower than if the Fund invested
directly in various types of securities. Of course, there is no guarantee that
asset growth and lower expenses will be achieved. Advisers, however, has agreed
in advance to limit expenses so that they will not be higher than if the Fund
invested directly in the types of securities held by the Portfolio. Advisers may
end this arrangement at any time upon notice to the Board. For more information
on the fees and expenses of the Fund and the Portfolio, please see "Who
Administers the Fund?"
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent six periods appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
YEAR ENDED OCTOBER 31,
----------------------
1996 1995 1994 19933 19932 19921
- -------------------------------------------------------------------------------
Per Share Operating Performance
Net Asset Value
at Beginning of Period $9.82 $9.70 $10.04 $10.03 $10.00 $10.00
Net Investment Income 0.54 0.58 0.45 0.37 0.60 -
Net Realized & Unrealized
Gain (Loss) on Securities 0.055 0.120 (0.341) 0.009 0.031 -
Total From
Investment Operations 0.595 0.700 0.109 0.379 0.631 -
Distribution From
Net Investment Income (0.545) (0.580) (0.449) (0.369) (0.601) -
Distributions
From Capital Gains - - - - - -
Total Distributions (0.545) (0.580) (0.449) (0.369) (0.601) -
Net Asset Value
at End of Period $9.87 $9.82 $9.70 $10.04 $10.03 $10.00
Total Return** 6.23% 7.57% 1.11% 3.83% 6.48% -%
Ratios/Supplemental Data
Net Assets
at End of Period (in 000's) $15,707 $17,014 $24,564 $37,809 $12,521 -
Ratio of Expenses
to Average Net Assets+,4 0.90% 0.70% 0.45% 0.11%* - -
Ratio of Net Investment Income
to Average Net Assets 5.54 5.82% 4.45% 4.69%* 5.84% -
Portfolio Turnover Rate 41.67 53.30% 84.67% 49.11% 48.95% -
1For the period December 26, 1991 (effective date of registration) to January
31, 1992.
2For the year ended January 31, 1993.
3For the nine months ended October 31, 1993, resulting from a change in fiscal
year end from January 31.
4Includes the Fund's share of the Portfolio's allocated expenses.
*Annualized.
**Total return measures the change in value of an investment over the periods
indicated and is not annualized. It does not include the maximum front-end sales
charge, and assumes reinvestment of dividends and capital gains, if any, at Net
Asset Value. Before May 1, 1994, dividends were reinvested at the maximum
Offering Price.
+During the periods indicated, Advisers agreed in advance to limit its
administration fees and make payments of other expenses incurred by the Fund and
the Portfolio. Had such action not been taken, the ratio of operating expenses
to average net assets would have been as follows:
19921................. -%
19932................. 1.91%4
19933................. 1.01%4*
1994.................. 0.85%4
1995.................. 0.99%4
1996.................. 1.12%4
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek a high level of current income,
consistent with lower volatility of principal than a fund that invests in
fixed-rate securities. The Fund seeks to achieve its objective by investing all
of its assets in the Portfolio. The investment objective of the Portfolio is the
same as the Fund's. The investment policies of the Fund are also substantially
similar to the Portfolio's except, in all cases, the Fund may pursue its
policies by investing in an open-end management investment company with the same
investment objective and substantially similar policies and restrictions as the
Fund. Any additional exceptions are noted below.
The Fund buys shares of the Portfolio at Net Asset Value. An investment in the
Fund is an indirect investment in the Portfolio. The investment objective of
both the Fund and the Portfolio is fundamental and may not be changed without
shareholder approval. Of course, there is no assurance that the objective will
be achieved.
THE FUND'S MASTER/FEEDER FUND STRUCTURE
An investment in the Fund may be subject to certain risks due to the Fund's
structure. These risks include the potential that if other future shareholders
in the Portfolio sell their shares, the Fund's expenses may increase or the
economies of scale that 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 also have effective
voting control over the operation of the Portfolio. Furthermore, if 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.
If the Board considers it to be in the best interest of the Fund, the Fund may
withdraw its investment in the Portfolio at any time. In that event, the Board
would consider what action to take, including the investment of all of the
assets of the Fund in another pooled investment entity with the same investment
objective and substantially similar policies as the Fund or the hiring of an
investment advisor to manage the Fund's investments. Either circumstance may
cause an increase in Fund expenses.
The Fund's structure is a relatively new format that often results in certain
operational and other complexities. The Franklin organization was one of the
first mutual fund complexes in the country to implement this structure, and the
Board does not believe the additional complexities outweigh the potential
benefits to be gained by shareholders.
Whenever the Fund, as an investor in the Portfolio, is asked to vote on a matter
relating to the Portfolio, the Fund will hold a meeting of Fund shareholders and
will cast its votes in the same proportion as the Fund's shareholders have
voted.
The Franklin Templeton Funds have one other fund, designed for institutional
investors only, that invests in the Portfolio. In the future, other funds may be
created that may likewise invest in the Portfolio or existing funds may be
restructured so that they may invest in the Portfolio. If requested, we will
forward additional information to you about other funds through which you may
invest in the Portfolio. If you would like to receive this information, please
call Fund Information.
The Portfolio is a diversified series of the Adjustable Rate Securities
Portfolios, an open-end management investment company. The Adjustable Rate
Securities Portfolios was organized as a Delaware business trust on February 15,
1991, and is registered with the SEC under the 1940 Act. The Adjustable Rate
Securities Portfolios currently issues shares in two separate series. In the
future, additional series may be added by the Board of Trustees of the
Adjustable Rate Securities Portfolios.
For information on the Fund's administrator and its expenses, please see "Who
Administers the Fund?"
TYPES OF SECURITIES IN WHICH THE PORTFOLIO MAY INVEST
The Portfolio will seek to achieve its investment objective by investing at
least 65% of its total assets in adjustable rate securities collateralized by or
representing an interest in mortgages, including Adjustable Rate Mortgage
Securities ("ARMS") issued or guaranteed by private institutions or by the U.S.
government, its agencies or instrumentalities, and other adjustable rate
asset-backed securities (collectively, "ARS"), which have interest rates that
reset at periodic intervals. The Portfolio may invest in ARMS issued by private
institutions such as commercial banks, savings and loan institutions, insurance
companies, private mortgage insurance companies, mortgage bankers, mortgage
conduits of investment banks, finance companies, real estate companies, private
corporations and others, as long as they are consistent with the Portfolio's
investment objective. Privately issued mortgage securities are generally
structured with one or more types of credit enhancement.
The Portfolio may also invest up to 35% of its total assets in (a) notes, bonds
and discount notes of the 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) time and
savings deposits (including CDs) in commercial or savings banks or in
institutions whose accounts are insured by the Federal Deposit Insurance
Corporation ("FDIC"), and (d) asset-backed and mortgage-backed securities issued
by private and government entities. These securities may either be fixed rate or
adjustable rate securities. The Portfolio's investment in time deposits will not
exceed 10% of its total assets.
The Portfolio will only invest in securities rated at least AA by S&P or Aa by
Moody's, two nationally recognized statistical rating agencies. The Portfolio
may also invest in unrated securities if Advisers determines that they are of
comparable quality to the ratings above.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in U.S. government securities, CDs of banks having total assets in excess
of $5 billion, and repurchase agreements.
MORTGAGE SECURITIES - General Characteristics. A mortgage security is an
interest in a pool of mortgage loans. The primary issuers or guarantors of
mortgage securities 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 principal and interest on GNMA securities are guaranteed by GNMA
and the guarantee is backed by the full faith and credit of the U.S. government.
Mortgage securities of FNMA and FHLMC are not backed by the full faith and
credit of the U.S. government. FNMA guarantees full and timely payment of all
interest and principal, and FHLMC guarantees timely payment of interest and the
ultimate collection of principal. Securities issued by FNMA are supported by the
agency's right to borrow money from the U.S. Treasury under certain
circumstances. Securities issued by FHLMC are supported only by the credit of
the agency. There is no guarantee that the government will support government
agency securities and, accordingly, they may involve a risk of non-payment of
principal and interest. Nonetheless, because FNMA and FHLMC are
instrumentalities of the U.S. government, securities issued by them are
generally considered to be high quality investments having minimal credit risks.
The yields on these mortgage securities have historically exceeded the yields on
other types of U.S. government securities with comparable maturities due largely
to their prepayment risk. (See "What are the Fund's Potential Risks?")
The Portfolio may invest in private mortgage securities. Private issuers of
mortgage securities may be both the originators of the underlying mortgage loans
as well as the guarantors of the mortgage securities. Pools of conventional
residential mortgage loans created by private 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 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 companies or the mortgage poolers. The insurance and
guarantees and the creditworthiness of their issuers will be considered when
determining whether a mortgage security meets the Portfolio's quality standards.
The Portfolio may buy mortgage securities without insurance or guarantees if,
through an examination of the loan experience and practices of the poolers,
Advisers determines that the securities meet the Portfolio's quality standards.
Most mortgage securities are pass-through securities. This means that they
provide investors with payments consisting of a pro rata share of both regular
interest and principal payments, as well as unscheduled early prepayments, on
the underlying mortgage pool. Guarantees as to the timely payment of principal
and interest do not extend to the value or yield of mortgage securities nor do
they extend to the value of the Portfolio's or the Fund's shares.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional mortgage securities,
are interests in pools of mortgage loans. The interest rates on the mortgages
underlying ARMS are reset periodically. As the interest rates are reset, the
yields of the securities will gradually align themselves to reflect changes in
market rates so that their market value will remain relatively stable as
compared to fixed rate securities. As a result, the Portfolio's Net Asset Value
should fluctuate less significantly than if the Portfolio invested in more
traditional long-term, fixed rate securities. During periods of rising interest
rates, changes in the interest rates on mortgages underlying ARMS lag behind
changes in the market rate. This may result in a lower Net Asset Value until the
interest rate resets to market rates. Thus, you could suffer some principal loss
if you sell your shares of the Fund before the interest rates on the underlying
mortgages in the Portfolio reset to reflect current market rates. During periods
of extreme fluctuation in interest rates, the Portfolio's and thus the Fund's
Net Asset Value will fluctuate as well. A portion of the ARMS in which the
Portfolio may invest may not reset for up to five years. Since most mortgage
securities held by the Portfolio will generally have annual reset limits or caps
of 100 to 200 basis points, short-term fluctuations in interest rates above
these levels could cause these mortgage securities to "cap out" and behave more
like long-term, fixed rate debt securities.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, the Portfolio may participate in increases in interest rates,
resulting in both higher current yields and lower price fluctuations. This
differs from fixed rate mortgages, which generally decline in value during
periods of rising interest rates. If prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, the Portfolio
generally will be able to reinvest these 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 exceed the maximum allowable
annual or lifetime reset limits (or "cap rates") for a particular mortgage
security.
During periods of declining interest rates, of course, the interest rates may
reset downward, resulting in lower yields to the Portfolio. As a result, the
value of ARMS is unlikely to rise during periods of declining interest rates to
the same extent as the value of fixed rate securities. As with other mortgage
backed securities, declining interest rates may result in accelerated prepayment
of mortgages and the proceeds from the prepayments may then have to be
reinvested at the 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, changes in accordance with movements in a 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.
Mortgage loan pools offering pass-through investments in addition to those
described above may be created in the future. 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 securities are developed and offered to investors, the Portfolio may
invest in them if they are consistent with the Portfolio's objective, policies
and quality standards.
ADJUSTABLE RATE SECURITIES. The Portfolio will invest primarily in ARS. ARS are
debt securities with interest rates that are adjusted periodically pursuant to a
pre-set formula and interval. The interest paid on ARS and, therefore, the
current income earned by the Portfolio by investing in ARS, will be a function
primarily of the indices on which adjustments are based and the applicable
spread relating to the ARS. (Please see "Resets.")
The interest rates on ARS are generally readjusted periodically to an increment
over the chosen interest rate index. These 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 the
Portfolio's and thus the Fund's shares will be a function primarily of the
length of the adjustment period and the degree of volatility in the applicable
indices. 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 Advisers will consider caps
or floors in selecting ARS for the Portfolio.
While the Portfolio does not attempt to maintain a stable Net Asset Value per
share, during periods when short-term interest rates move within the caps and
floors of the securities held by the Portfolio, the fluctuation in market value
of the ARS held by the Portfolio is expected to be relatively limited, since the
interest rate on the ARS will generally adjust to market rates within a short
period of time. In periods of substantial short-term volatility in 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 the interest rates during any one
adjustment period. In the event of dramatic increases in interest rates, the
lifetime caps on the ARS may prevent the securities from adjusting to prevailing
rates over the term of the loan. In this case, the market value of the ARS may
be substantially reduced with a corresponding decline in the Portfolio's, and
thus the Fund's, Net Asset Value.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMO"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS") AND MULTI-CLASS PASS-THROUGHS. The Portfolio may invest in
CMOs and REMICs issued and guaranteed by U.S. government agencies or
instrumentalities. It may also invest in CMOs and REMICs issued by certain
financial institutions and other mortgage lenders and in multi-class
pass-through securities.
CMOs and REMICs are debt instruments issued by special purpose entities that are
secured by pools of mortgage loans or other mortgage-backed securities.
Multi-class pass-through securities are equity interests in a trust composed of
mortgage loans or other mortgage-backed securities. Payments of principal and
interest on the underlying collateral provides the funds to pay the debt service
on CMOs or REMICs or to make scheduled distributions on the multi-class
pass-through securities. Unless the context indicates otherwise, the discussion
of CMOs below may also apply to REMICs and multi-class pass-through securities.
CMOs are issued in multiple classes. Each class, often referred to as a
"tranche," is issued at a specified coupon rate or adjustable rate and has a
stated maturity or final distribution date. Principal prepayments on collateral
underlying CMOs may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Interest is paid or accrues
on all classes of a CMO on a monthly, quarterly or semiannual basis. The
principal and interest on the mortgages underlying CMOs may be allocated among
the several classes in many ways. In a common structure, payments of principal
on the underlying mortgages, including any principal prepayments, 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 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 that 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 treated as ARMS by the Portfolio. Floating rate CMOs may be backed by fixed
or adjustable rate mortgages. To date, fixed rate mortgages have been more
commonly used for this purpose. Floating rate CMOs are typically issued with
lifetime "caps" on the coupon rate. These caps, similar to the caps on ARMS,
represent a ceiling beyond which the coupon rate may not be increased,
regardless of increases in the underlying interest rate index.
Yields on privately issued CMOs have been historically higher than the yields on
CMOs issued and guaranteed by U.S. government agencies or instrumentalities. The
risk of loss due to default on privately issued CMOs, however, is higher since
they are not guaranteed by the U.S. government. The trustees of the Portfolio
believe that the risk of loss to the Portfolio relating to its investments in
privately issued CMOs is justified by the higher yield the Portfolio will earn
in light of the historic loss experience on these instruments. The Portfolio
will not invest in subordinated privately issued CMOs.
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 underlying mortgages include
those 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 and that are not guaranteed by any government agency or
instrumentality.
Advisers currently intends to limit the Portfolio's 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.
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 those securities in a manner consistent with the 1940
Act.
RESETS. The interest rates paid on ARMS, ARS and CMOs generally are readjusted
at intervals of one year or less to an increment over some predetermined
interest rate index, although some securities in which the Portfolio may invest
may have intervals as long as five years. There are three main categories of
indices: those based on LIBOR; those based on U.S. Treasury securities; and
those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the one-,
three- and five-year constant maturity Treasury rates, the three-month Treasury
bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-, three-, six-month or one-year 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 Federal Home Loan Bank
Cost of Funds, tend to lag behind changes in market interest rate levels and
tend to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages that collateralize ARMS and CMOs will
frequently have caps and floors that 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 invest in stripped mortgage
securities, which are derivative multi-class 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, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security has one
class that receives some of the interest and most of the principal from the
mortgage assets, while the other class receives most of the interest and the
remainder of the principal. In the most extreme case, one class receives all of
the interest (the interest-only or "IO" class), while the other class receives
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
underlying mortgage assets. A rapid rate of principal payments may have a
material adverse effect on the yield to maturity of any IO class 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, 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 Portfolio, 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 stripped
mortgage securities. Accordingly, some of these securities may be illiquid. The
staff of the SEC has indicated that only government-issued IO or PO securities
that are backed by fixed rate mortgages may be deemed to be liquid, if
procedures with respect to determining liquidity are established by a fund's
board. The Board of Trustees of the Portfolio may, in the future, adopt
procedures that would permit the Portfolio 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 Portfolio's net assets. This
position may be changed in the future, without notice to shareholders, in
response to the SEC staff's continued reassessment of this matter, as well as to
changing market conditions.
FLOATERS. Up to 5% of the Portfolio's assets may be invested in inverse floaters
and super floaters. Please see the SAI for more information about these
investments.
ASSET-BACKED SECURITIES. The Portfolio may invest in asset-backed securities,
including adjustable rate asset-backed securities that have interest rates that
reset at periodic intervals. Asset-backed securities are similar to
mortgage-backed securities. The underlying assets, however, may include
receivables on home equity and credit card loans, and automobile, mobile home
and recreational vehicle loans and leases.
Asset-backed securities are issued in either a pass-through structure (similar
to a mortgage pass-through structure) or a pay-through structure (similar to a
CMO structure). There may be other types of asset-backed securities that are
developed in the future in which the Portfolio may invest. In general,
collateral supporting asset-backed securities has shorter maturities than
mortgage loans and historically has been less likely to experience substantial
prepayment.
DERIVATIVES. Some of the types of investments discussed in this prospectus may
be considered "derivatives." Derivatives are broadly defined as financial
instruments whose performance is derived, at least in part, from the performance
of an underlying asset. To the extent indicated, the Portfolio may invest in
CMOs, REMICs, uncovered mortgage dollar rolls, multi-class pass-throughs,
stripped mortgage securities, other asset-backed securities, and structured
notes. Some, all or the component parts of these instruments may be considered
derivatives. The Portfolio may use these instruments to help manage risks
relating to interest rates and other market factors, increase liquidity, and/or
invest in a particular instrument in a more efficient or less expensive way. The
Portfolio will not necessarily use these instuments or investment strategies to
the full extent permitted unless Advisers believes that doing so will help the
Portfolio reach its investment objective, and not all instruments or strategies
will be used at all times.
OTHER INVESTMENT POLICIES OF THE PORTFOLIO
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 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.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase transactions in
which the Portfolio buys 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 that are deemed
creditworthy by Advisers. 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 bank
approved by the Portfolio's Board of Trustees and will be held pursuant to a
written agreement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio may buy any
securities for its portfolio on a "when-issued" or "delayed delivery" basis.
These transactions are arrangements under which the Portfolio buys securities
with payment and delivery scheduled for a future time, generally within 30 to 60
days. Purchases of securities on a when-issued or delayed delivery basis are
subject to market fluctuation and the risk that the value or yield at delivery
may be more or less than the purchase price or the yield available when the
transaction was entered into. Although the Portfolio will generally buy
securities on a when-issued basis with the intention of holding the securities,
it may sell the securities before the settlement date if it is deemed advisable.
When the Portfolio is the buyer, it will maintain, in a segregated account with
its custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of its 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 its 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 seller'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 that may be invested in when-issued purchase obligations.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Portfolio's Board of Trustees and subject to the following conditions, the
Portfolio may lend its portfolio securities to qualified securities dealers or
other institutional investors, if the loans do not exceed 10% of the value of
the Portfolio's total assets at the time of the most recent loan. The borrower
must deposit with the Portfolio's custodian bank 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%. This collateral shall consist of cash. The lending of securities is
a common practice in the securities industry. The Portfolio may engage 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.
BORROWING. The Portfolio may borrow from banks from time to time to increase its
investments. Borrowings may be secured or unsecured, and at fixed or variable
interest rates. The Portfolio will borrow only to the extent that the value of
its assets, less its liabilities (excluding 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 the 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 Portfolio's Net Asset
Value may increase or decrease at a greater rate than 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.
The Fund may not borrow money or mortgage or pledge any of its assets, except
that borrowings (and a pledge of assets in connection therewith) for temporary
or emergency purposes may be made from banks in an amount up to 20% of its total
assets.
ILLIQUID INVESTMENTS. The Portfolio's policy is not to invest more than 10% of
its net asset, at the time of purchase, in illiquid securities. Illiquid
securities are generally securities that cannot be sold within seven days in the
normal course of business at approximately the amount at which the Portfolio has
valued them. They include, among others, repurchase agreements and time and
savings deposits of more than seven days duration.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund and the Portfolio have a number of
additional investment restrictions that limit their activities to some extent.
Some of these restrictions may only be changed with shareholder approval. For a
list of these restrictions and more information about the Portfolio's and the
Fund's investment policies, please see "How does each Fund Invest its Assets?"
and "Investment Restrictions" in the SAI.
THE ADVANTAGES OF INVESTING IN THE FUND
The Fund enables you to invest easily in adjustable rate securities rated in the
top two rating categories by nationally recognized statistical rating agencies
or issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Any guarantee will extend to the payment of interest and
principal due on the securities and will not provide any protection from
fluctuations in the market value of the securities. The Fund believes that by
investing in the Portfolio, which in turn invests primarily in securities that
provide for variable interest rates, it will achieve a more consistent and less
volatile Net Asset Value than is characteristic of mutual funds that invest
primarily in similar securities paying a fixed interest rate. Principal payments
received on the Portfolio's mortgage securities will be reinvested by the
Portfolio in other securities. These securities may have a higher or lower yield
than the mortgage securities already held by the Portfolio, depending on market
conditions.
An investment in the Fund also provides liquidity since you may redeem shares of
the Fund at any time at the current Net Asset Value. Please see "How Do I Sell
Shares?" in this prospectus.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. Since the Fund invests its assets in shares of the
Portfolio, as the value of the Securities owned by the Portfolio fluctuates, the
Portfolio's Net Asset Value per share, and thus the Fund's Net Asset Value per
share, will also fluctuate.
MORTGAGE SECURITIES. The mortgage securities in which the Portfolio invests
differ from conventional bonds in that principal is paid 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 that 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. In general, fixed rate mortgage securities have greater exposure
to this "prepayment risk" than ARMS.
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. ARMS, however,
have less risk of a decline in value during periods of rapidly rising rates, but
like other mortgage securities, 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 applicable caps or maximum
rates on ARMS or beyond the coupon rates of fixed-rate mortgage securities, 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
that, when distributed to shareholders, will be taxable as ordinary income.
With respect to pass-through mortgage pools issued by private issuers, there is
no assurance that private insurers of the securities will be able to meet their
obligations. Although the market for privately issued mortgage securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. These securities are subject to the Portfolio's
limit with respect to illiquid investments.
ADJUSTABLE RATE SECURITIES. ARS have several characteristics that should be
considered before you invest in the Fund. As indicated above, the interest rate
reset features of ARS held by the Portfolio will reduce the effect on the
Portfolio's Net Asset Value per share caused by changes in market interest
rates. The market value of ARS and, therefore, the Portfolio's and the Fund's
Net Asset Value may vary, however, to the extent that the current interest rate
on ARS differs from market interest rates during periods between the interest
rate reset dates. 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 and if market
interest rates fall below the current rate on the securities, the value of the
securities will rise. The longer the adjustment intervals on ARS held by the
Portfolio, the greater the potential will be for fluctuations in the Portfolio's
and thus the Fund's Net Asset Value.
As an investor in the Fund, you 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 the rates rise to the
point where they cause the rates on ARS to reach their maximum adjustment rate,
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.
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 the loans on the basis of the original payment
amounts. The mortgagor's income may not be sufficient to enable the mortgagor to
continue making loan payments as the 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. The Fund, therefore, is not designed for
investors seeking capital appreciation.
ASSET-BACKED SECURITIES. Asset-backed securities entail certain risks not
present with mortgage-backed securities as they do not have the benefit of the
same type of security interests in the underlying 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 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 the receivables due to
the large number of vehicles involved in a typical issuance and the technical
requirements imposed under state laws. Therefore, recoveries on repossessed
collateral may not always be available to support payments on securities backed
by these receivables. For more information about the risks of investing in
asset-backed securities, please see the SAI.
INTEREST RATE RISK. Changes in interest rates will affect the value of the
Portfolio's and thus the Fund's holdings and thus affect both the Portfolio's
and the Fund's share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to have a negative effect on
the value of the Portfolio's and the Fund's shares. Interest rates have
increased and decreased in the past. These changes are unpredictable and may
happen again in the future.
Investments in fixed rate securities generally decline in value during periods
of rising interest rates and increase in value when interest rates fall. To the
extent the Portfolio invests in fixed rate securities, the value of the
Portfolio's and thus the Fund's shares will be more sensitive to interest rate
changes than if the Portfolio were fully invested in adjustable rate securities.
WHO ADMINISTERS THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
The Board, with approval of all disinterested and interested Board members, has
adopted written procedures designed to deal with potential conflicts of interest
that may arise from the Fund and Money Market having substantially the same
boards. These procedures call for an annual review of the Fund's relationship
with the Portfolio. If a conflict exists, the boards may take action, which may
include the establishment of a new board. The Board has determined that there
are no conflicts of interest at the present time. For more information, please
see "Summary of Procedures To Monitor Conflicts of Interest" and "Officers and
Directors" in the SAI.
INVESTMENT MANAGER AND ADMINISTRATOR. Advisers manages the Portfolio's assets
and makes its investment decisions. Advisers also performs similar services for
other funds. It is wholly owned by Resources, a publicly owned company engaged
in the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $179 billion in assets.
Advisers is also the administrator of the Fund. Please see "Investment
Management and Other Services" and "Miscellaneous Information" in the SAI for
information on securities transactions and summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Portfolio since inception is:
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since earning his MBA degree in 1991.
T. Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned his
Bachelor of Arts degree in applied mathematics and economics from Harvard
University. Mr. Coffey has been with the Franklin Templeton Group since 1989. He
is a member of several securities industry-related associations.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
MANAGEMENT FEES. You will bear a portion of the Portfolio's operating expenses,
including its management fees, to the extent that the Fund, as a shareholder of
the Portfolio, bears these expenses. The portion of the Portfolio's expenses
borne by the Fund depends on the Fund's proportionate share of the Portfolio's
net assets.
During the fiscal year ended October 31, 1996, the Fund's proportionate share of
the Portfolio's management fees and the Fund's administration fees, before any
advance waiver, totaled 0.40% and 0.10% of the average daily net assets of the
Fund. Total operating expenses, including fees paid to Advisers before any
advance waiver, totaled 1.12%. Under an agreement by Advisers to limit its fees
and to make certain payments to reduce expenses so that the Fund's and the
Portfolio's total operating expenses are not more than if the Fund invested
directly in the securities held by the Portfolio, the Fund paid a proportionate
share of the Portfolio's management fees and administration fees totaling 0.28%.
Total expenses of the Fund were 0.90%. Advisers may end this arrangement at any
time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Portfolio Buy Securities?" in the SAI for more
information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.25% per year of the Fund's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. During the first year after certain
purchases made without a sales charge, Distributors may keep the Rule 12b-1 fees
associated with the purchase. For more information, please see "The Fund's
Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measures of performance are total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each Fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and intends to continue to qualify 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 that you receive 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 you have 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 you have 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,
1996, qualified for the corporate dividends-received deduction and it is not
expected that distributions for the current fiscal year will so qualify.
Pursuant to the Code, certain distributions that are declared in October,
November or December, but which, for operational reasons, may not be paid to you
until the following January, will be treated as if received by you on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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.
You should consult with your tax advisor concerning the tax rules applicable to
the redemption and exchange of Fund shares.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will promptly after the close of each calendar year
advise you 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 the fiscal
year ended October 31, 1996, 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. You should consult with
your own tax advisor with respect to the applicability of state and local
intangible property or income taxes to your shares of the Fund and distributions
and redemption proceeds received from the Fund.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding taxes to distributions received by you from the Fund and the
application of foreign tax laws to these distributions.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of the Franklin Investors Securities Trust (the
Trust), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. Shares of each series of the
Trust have equal and exclusive rights to dividends and distributions declared by
that series and the net assets of the series in the event of liquidation or
dissolution. Shares of the Fund are considered Class I shares for redemption,
exchange and other purposes. Additional series and classes of shares may be
offered in the future.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that affect
the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM
INVESTMENTS*
To Open Your Account.......... $100
To Add to Your Account........ $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
- If you qualify to buy shares under one of the sales charge reduction or
waiver categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
Under $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 None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell, and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on
any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to
invest at least $500,000 in the Franklin Templeton Funds over a 13 month
period. Retirement plans that are not Qualified Retirement Plans or SEPS,
such as 403(b) or 457 plans, must also meet the requirements described
under "Group Purchases" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
11. Registered Securities Dealers and their affiliates, for their investment
accounts only
12. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
13. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for certain purchases made without a sales charge. The payments
are subject to the sole discretion of Distributors, and are paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 0.75% of the purchase price.
2. Purchases made under waiver category 8 above - up to 1% of the purchase
price.
3. Purchases made under waiver categories 6, 9 and 10 above - up to 0.25% of the
purchase price.
A Securities Dealer may only receive one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1 or 2 above will be eligible to receive the Rule 12b-1
fee associated with the purchase starting in the thirteenth calendar month after
the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to apply
to your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON
YOUR ACCOUNT. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Beginning on or about May 1, 1997, you may also exchange
Class Z shares of Franklin Mutual Series Fund Inc. for shares of the Fund at Net
Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
BY PHONE Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and o If the request is $50,000 or less. Institutional
sent to us the accounts may exceed $50,000 by completing a separate
telephone agreement. Call Institutional Services to receive a copy.
redemption
agreement o If there are no share certificates issued for the
included with shares you want to sell or you have already returned
this prospectus.) them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 30 days
THROUGH YOUR DEALER Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance of
$1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to termination
or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed annually, usually in December
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. For
Trust Company retirement plans, special forms are required to receive
distributions in cash. You may change your distribution option at any time by
notifying us by mail or phone. Please allow at least seven days before the
reinvestment date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value and Offering
Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's and the Portfolio's
assets are valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS. The Fund's code number is
151.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Portfolio's investment manager and the
Fund's administrator
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 2.25% sales charge.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
ADVISOR CLASS
INVESTMENT STRATEGY
GLOBAL INCOME
ADVISOR
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes the Advisor Class shares of the Franklin Global
Government Income Fund (the "Fund"). It contains information you should know
before investing in the Fund. Please keep it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated March 1, 1997, which may be amended from time to time. It includes
more information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporated by reference into this prospectus. For a free
copy or a larger print version of this prospectus, call 1-800/DIAL BEN or write
the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - ADVISOR CLASS
March 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary ................................... 2
How does the Fund Invest its Assets? .............. 2
What are the Fund's Potential Risks? .............. 12
Who Manages the Fund? ............................. 17
How does the Fund Measure Performance? ............ 18
How Taxation Affects the Fund and its Shareholders. 19
How is the Trust Organized? ....................... 21
About Your Account
How Do I Buy Shares? .............................. 21
May I Exchange Shares for Shares of Another Fund?.. 24
How Do I Sell Shares? ............................. 26
What Distributions Might I Receive from the Fund?.. 27
Transaction Procedures and Special Requirements.... 28
Services to Help You Manage Your Account .......... 32
What If I Have Questions About My Account? ........ 34
Glossary
Useful Terms and Definitions ...................... 34
Appendix
Description of Ratings ............................ 36
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Global Government Income Fund
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. Since Advisor Class shares were not offered until January 1, 1997, the
table is based on the historical expenses of the Fund's Class I shares for the
fiscal year ended October 31, 1996. The Fund's actual expenses may vary.
A. Shareholder Transaction Expenses*
Maximum Sales Charge Imposed on Purchases None
Exchange Fee (per transaction) $5.00**
B. Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.58%
Rule 12b-1 Fees None
Other Expenses 0.17%
Total Fund Operating Expenses 0.75%
C. Example
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the pro-jected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$8 $24 $42 $93
This is just an example. It does not represent past or future expenses or
returns. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of the class and are not directly charged
to your account.
*If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
**$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
How does the Fund Invest its Assets?
The Fund's Investment Objective
The Fund's 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. Of course, there is no assurance that the
Fund's objective will be achieved.
Types of Securities in which the Fund May Invest
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in securities issued or guaranteed by domestic and foreign governments
and their political subdivisions, including the U.S. government, its agencies,
and authorities or instrumen-
talities ("U.S. government securities"). Securities issued by central banks
that are guaranteed by their national governments are considered to be
government securities.
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 are generally considered "derivative securities." A detailed
description of these financial transactions is included below. The risk
considerations involved in global investing generally are included under "What
are the Fund's Potential Risks?"
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. 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").
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. 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 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.
The Fund may invest in debt securities with varying maturities. Under current
market conditions, it is expected that the dollar-weighted average maturity of
the Fund's investments will not exceed 15 years. Generally, the portfolio's
average maturity will be shorter when, in the opinion of Advisers, 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 SAI. 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 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 a government
jurisdiction that are not backed by its full faith and credit and general taxing
powers.
The Fund will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its objective 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 may involve greater
exposure to the risks ordinarily associated with foreign investing. See "What
are the Fund's Potential Risks? - Foreign Securities." Advisers does not
currently expect the Fund's investments in less developed and developing
countries to exceed 20% of the Fund's 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.
Bank 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).
Loan Participations. The Fund is authorized to acquire loan participations in
which the Fund will buy from a lender a portion of a larger loan that it has
made to a borrower. Generally, 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. 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 SAI.
Lower Rated Debt Obligations. The Fund may invest in higher yielding, higher
risk, lower rated debt obligations that are rated at least B by Moody's or S&P,
or if unrated, are at least of comparable quality as determined by Advisers. The
Fund currently holds approximately 13% in lower rated investments and may in the
future increase this percentage, but such investments will be less than 35% of
the Fund's net assets. Many debt obligations of foreign issuers, especially
developing market issuers, are not rated by U.S. rating agencies and their
selection depends on Advisers' internal analysis. Securities rated BB or lower
by S&P or Ba or lower by Moody's (sometimes referred to as "junk bonds") are
regarded as predominately speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation
and therefore involve special risks. See "What are the Fund's Potential Risks? -
High Yielding, Fixed-Income Securities" and the "Appendix" for a discussion of
the ratings categories.
Currency Techniques and Hedging. The Fund intends to pursue its investment
objective through investments in options, futures, options on futures and
forward contracts. These securities are generally considered "derivative
securities." Investment in these securities is not a fundamental policy of the
Fund, and may be changed at the discretion of the Board without prior notice or
shareholder approval. While there are no specific limits on the Fund's use of
these practices other than those limits stated below, the Fund only engages in
these practices for hedging purposes, or in other words for the purpose of
protecting against declines in the value of the Fund's portfolio securities and
the income on these securities. The production of additional income may at times
be a secondary purpose of these practices.
Forward Currency Exchange Contracts. The Fund may enter into forward currency
exchange contracts ("Forward Contract[s]") to attempt to minimize the risk to
the Fund from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to buy 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.
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 daily. The ability of the Fund to
enter into Forward Contracts is limited only to the extent Forward Contracts
would, in the opinion of Advisers, 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 buy put and call options on U.S. or foreign securities
that are traded on U.S. and foreign securities exchanges and in
over-the-counter markets.
Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call. A call option is also covered if the
Fund holds a call on the same security and in the same principal amount as the
call written and the exercise price of the call held is (a) equal to or less
than the exercise price of the call written, or (b) greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations in a segregated
account with its custodian bank.
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 in a secondary market with respect to options it has written, 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 described under "What are
the Fund's Potential Risks?" In addition, a foreign exchange may impose
different exercise and settlement terms, procedures and margin requirements than
a U.S. exchange.
The Fund may buy 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 buy 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 resulting in a
loss to the Fund equal to the cost of the options.
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 (including 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
SAI.
Options on Foreign Currencies. The Fund may buy 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 buy 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 SAI.
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 buy or write options to buy or sell Futures
Contracts traded on U.S. and foreign exchanges ("Options on Futures Contracts").
Options, futures and options on futures are generally considered "derivative
securities." These investment techniques are designed only to hedge against
anticipated future changes in interest rates that otherwise might either
adversely affect the value of the Fund's portfolio securities or adversely
affect the prices of securities that the Fund intends to buy 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.
The Board has 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 buy 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. A further discussion of the use, risks
and costs of Futures Contracts and Options on Futures Contracts is included in
the SAI.
Other Investment Policies of the Fund
During periods when Advisers believes that the Fund should be in a temporary
defensive position, the Fund may have less than 25% of its assets concentrated
in foreign government securities and may invest instead in U.S. government
securities. 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: CDs, 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.
Loans of Portfolio Securities. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 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 bank 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%. This
collateral shall consist of cash. The lending of securities is a common practice
in the securities industry. The Fund may engage in security loan arrangements
with the primary objective of increasing the Fund's income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. 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 "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 buy 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 the Fund 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 buy a security on a when-issued or forward delivery
basis, it will set up segregated accounts, as described in "Forward Currency
Exchange Contracts" above, concerning such purchases. Although the Fund does not
intend to make such purchases for speculative purposes, purchases of securities
on such basis may involve more risk than other types of purchases. For example,
if the Fund determines it is necessary to sell the when-issued or forward
delivery securities before delivery, it may incur a gain or loss because of
market fluctuations since the time the commitment to buy the securities was
made.
Repurchase Agreements. The Fund may engage in repurchase transactions in which
the Fund buys 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 that are deemed creditworthy by Advisers. 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 bank approved by the 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 dealer 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. Advisers will
evaluate the creditworthiness of these entities prior to engaging in such
transactions, under the general supervision of the Board.
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.
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 Investments. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
Portfolio Turnover. The Fund's portfolio turnover rate for the fiscal years
ended October 31, 1995, and October 31, 1996 was 103.49% and 139.71%,
respectively. The high portfolio turnover rate for both fiscal years was due to
changing market conditions and a higher level of redemptions than in previous
years. High portfolio turnover may increase the Fund's transaction costs.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
Other Policies and Restrictions. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
What are the Fund's Potential Risks?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
Interest Rate, Currency and Market Risk. To the extent the Fund invests in debt
securities, changes in interest rates in any country where the Fund is invested
will affect the value of the Fund's portfolio and its share price. Rising
interest rates, which often occur during times of inflation or a growing
economy, are likely to have a negative effect on the value of the Fund's shares.
To the extent the Fund invests in common stocks, a general market decline in any
country where the Fund is invested, may cause the value of what the Fund owns,
and thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Fund shares. The value of stock markets, currency
valuations and interest rates throughout the world has increased and decreased
in the past. These changes are unpredictable and may happen again in the future.
Non-Diversification Risk. 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 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 non-diversified 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.
Foreign Currency. The Fund may invest in debt securities denominated in U.S. and
foreign currencies. A change in the value of any 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. These 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 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 its distributions. Similarly, if an exchange rate depreciates
between the time the Fund incurs expenses in U.S. dollars and the time the
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.
Foreign Securities. Investment in foreign securities involves certain risks that
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). Foreign
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 foreign 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 is contained in reports and reflected in ratings
published for 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. 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.
Confiscatory taxations or diplomatic developments could also affect investment
in those countries.
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.
High Yielding, Fixed-Income Securities. The Fund's investments in higher
yielding, lower-rated securities entail special risks. The market value of lower
rated, fixed-income securities and unrated securities of comparable quality,
commonly known as "junk bonds," tends to reflect individual developments
affecting the issuer to a greater extent than the market value of higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. These lower rated fixed-income
securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Baa by Moody's, ratings
which are considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these 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, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the Fund
may have unrealized losses on defaulted securities that are reflected in the
price of the Fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the Fund's net
assets are impacted prior to the default. The Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Fund.
Although these 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, Advisers may find it necessary to replace
the securities with lower yielding securities, which could result in less net
investment income to the Fund. The premature disposition of a high yielding
security due to a call or buy-back feature, the deterioration of the issuer's
creditworthiness, or a default may also make it more difficult for the Fund to
manage the timing of its receipt of income, which may have tax implications. The
Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute the
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on these obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Generally, buyers of
these securities are predominantly dealers and other institutional buyers,
rather than individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher rated securities. Reduced liquidity
in the secondary market may have an adverse impact on market price and the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs, or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "How are Fund Shares Valued?" in the SAI.)
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of these 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. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's Net Asset Value. In addition, the Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. The Fund will
rely on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
Asset Composition Table. A credit rating by a rating agency evaluates only the
safety of principal and interest of a security, and does not consider the market
value risk associated with the investment. The table below shows the percentage
of the Fund's assets invested in fixed income securities rated in each of the
specific rating categories shown and those that are not rated by the rating
agency but deemed by Advisers to be of comparable credit quality. The
information was prepared based on a dollar weighted average of the Fund's
portfolio composition based on month-end assets for each of the 12 months in the
fiscal year ended October 31, 1996. The Appendix to this prospectus includes a
description of each rating category.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 85.9%
AA 1.3%
BB 4.8%
BB-* 5.4%
B+ 2.5%
*1.9% of these securities, which are unrated by the rating agency, have been
included in the BB- rating category.
Who Manages the Fund?
The Board. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $179 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the Fund's Code of Ethics.
Under an agreement with Advisers, TICI is the sub-advisor of the Fund. TICI
provides Advisers with investment management advice and assistance. The
agreement provides for the sub-advisor to furnish, subject to Advisers'
discretion, a portion of the investment advisory services for which Advisers is
responsible pursuant to the management agreement. These responsibilities may
include managing a portion of the Fund's investments and supplying research
services. TICI's activities are subject to the Board's review and control, as
well as Advisers' instruction and supervision.
Management Team. The team responsible for the day-to-day management of the
Fund's portfolio is: Thomas J. Dickson since 1993, Neil S. Devlin since 1994
and Thomas Latta since 1995.
Thomas J. Dickson
Portfolio Manager of TICI
Mr. Dickson received his bachelor of science degree in managerial economics
from the University of California at Davis. Mr. Dickson joined the Franklin
Templeton Group in 1992.
Neil S. Devlin
Executive Vice President of TICI
Mr. Devlin is a Chartered Financial Analyst and holds a bachelor of arts
degree in economics and philosophy from Brandeis University. Mr. Devlin
joined the Franklin Templeton Group in 1987.
Thomas Latta
Portfolio Manager of TICI
Mr. Latta attended the University of Missouri and New York University. Mr.
Latta has been in the securities industry since 1981 and with the Franklin
Templeton Group since 1991. Prior to joining the Franklin Templeton Group,
Mr. Latta worked as a portfolio manager with Forester and Hairston, a global
fixed-income investment management firm, and prior thereto, he worked as an
investment adviser with Merrill Lynch.
Management Fees. During the fiscal year ended October 31, 1996, management fees
totaling 0.58% of the average monthly net assets of the Fund were paid to
Advisers. During the same period, Advisers paid TICI a sub-advisory fee totaling
0.25% of the average monthly net assets of the Fund. This fee is not a separate
expense of the Fund but is paid by Advisers from the management fees it receives
from the Fund.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
How does the Fund Measure Performance?
From time to time, the Advisor Class of the Fund advertises its performance. The
more commonly used measures of performance are total return, current yield and
current distribution rate.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by Advisor Class. The current distribution rate shows
the dividends or distributions paid to shareholders of Advisor Class. This rate
is usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Net Asset Value of the class.
Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
How Taxation Affects the Fund and its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and intends to continue to qualify 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.
Regular income dividends (which are generally distributed monthly) will be
determined from the Fund's net investment income, excluding any realized net
foreign currency gains and losses. Under the Code, net realized foreign currency
gains and losses are required to be reported as ordinary income or loss to the
Fund. Therefore, if in the course of a fiscal year, the Fund realizes net
foreign currency losses, the Fund may be required to reclassify all or a portion
of its income dividend distributions made during such fiscal year as a
return-of-capital for federal income tax purposes. Net foreign currency gains,
if any, will generally be distributed as a supplemental income dividend once
each year in December to reflect any net foreign currency gain realized by the
Fund as of October 31 of the current fiscal year. You will be informed of the
tax status of all distributions shortly after the close of each calendar year.
For federal income tax purposes, any income dividends which you receive 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 you have 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 you have 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 you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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.
For corporate shareholders, it is anticipated that no portion of the Fund's
dividends will qualify for the corporate dividends-received deduction.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of foreign
taxes paid by the Fund. For more information, please see the SAI.
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's investment in options, futures contracts, forward contracts, and
options on futures contracts, including transactions involving actual or deemed
short sales, may give rise to taxable income, gain or loss and will be subject
to special tax treatment under certain mark-to-market and straddle rules, the
effect of which may be to accelerate income to the Fund, defer Fund losses,
cause adjustments in the holding periods of Fund securities, convert capital
gains and losses into ordinary income and losses, convert long-term capital
gains into short-term capital gains, and convert short-term capital losses into
long-term capital losses. These rules could, therefore, affect the amount,
timing and character of distributions to shareholders. Certain elections may be
available to the Fund to mitigate some of the unfavorable consequences of the
provisions described in this paragraph. These investments and transactions are
discussed in the SAI.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
How is the Trust Organized?
The Fund is a non-diversified series of Franklin Investors Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. As of January 1, 1997, the
Fund began offering a new class of shares designated Franklin Global Government
Income Fund - Advisor Class. All shares outstanding before the offering of
Advisor Class shares have been designated Franklin Global Government Income Fund
- - Class I and Franklin Global Government Income Fund Class II. Additional series
and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
About Your Account
How Do I Buy Shares?
Opening Your Account
Shares of the Fund may be purchased without a sales charge. To open your
account, contact your investment representative or complete and sign the
enclosed shareholder application and return it to the Fund with your check.
MINIMUM
INVESTMENTS*
To Open Your Account $5,000,000
To Add to Your Account $ 25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares.
To determine if you meet the minimum investment requirement, the amount of your
current purchase is added to the cost or current value, whichever is higher, of
your existing shares in the Franklin Templeton Funds. At least $1 million of
this amount, however, must be invested in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds.
The Fund's minimum initial investment requirement will not apply to purchases
by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
2. Qualified registered investment advisors or certified financial planners who
have clients invested in the Franklin Mutual Series Fund Inc. on October 31,
1996, or who buy through a broker-dealer or service agent who has entered into
an agreement with Distributors
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Accounts managed by the Franklin Templeton Group
5. The Franklin Templeton Profit Sharing 401(k) Plan
6. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
7. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code, and that (i) are
sponsored by an employer with at least 5,000 employees, or (ii) have plan assets
of $50 million or more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or participants,
in the case of certain retirement plans, have full or shared investment
discretion
9. Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of the
Code, subject to a $1 million initial investment in Advisor Class shares
10. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if the
group as a whole meets the $5 million minimum investment requirement. A
qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
If you currently own Class I shares of the Fund and you qualify to buy Advisor
Class shares, you may invest your existing Class I shares into the Fund's
Advisor Class by June 30, 1997. If you would like to do this, please send us
written instructions. Generally, for federal income tax purposes, there will be
no recognition of gain or loss on this transaction. You may want to consult with
your tax advisor to determine the effect of this transaction, if any, on state
income taxes.
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Payments to Securities Dealers
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the purchase price. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
By Phone Call Shareholder Services
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this option
to be available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i)we believe the Fund would be harmed or unable
to invest effectively, or (ii) the Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
Limited Exchanges Between Different Classes of Shares
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. at Net Asset Value. If you
do so and you later decide you would like to exchange into a fund that offers an
Advisor Class, you may exchange your Class I shares for Advisor Class shares of
that fund. You may also exchange your Advisor Class shares for Class Z shares of
Franklin Mutual Series Fund Inc.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court jurisdiction
may have other requirements.
By Phone Call Shareholder Services
(Only available
if you have Telephone requests will be accepted:
completed and o If the request is $50,000 or less. Institutional accounts
sent to us may exceed $50,000 by completing a separate agreement.
the telephone Call Institutional Services to receive a copy.
redemption
agreement o If there are no share certificates issued for the shares
included with you want to sell or you have already returned them to
this prospectus) the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 30 days
Through Your Dealer Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. Please
notify us in writing if you do not want this option to be available on your
account. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
What Distributions Might I Receive from the Fund?
The Fund declares dividends from its net investment income monthly to
shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, or both dividend
and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value in many
newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy and sell Advisor Class shares at the Net Asset Value per share. We
calculate it to two decimal places using standard rounding criteria. The Net
Asset Value we use when you buy or sell shares is the one next calculated after
we receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor before signing. A notarized
signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
Corporation Corporate Resolution
Partnership 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Tax Identification Number
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
These minimums do not apply if you fall within categories 4, 5, 6, or 7 under
"How Do I Buy Shares? - Opening Your Account."
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? Systematic
Withdrawal Plan" in the SAI for more information.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. TICI is
located at Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida
33394-3091. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable Products
Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Market Timers - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
Trust Company - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
Appendix
Description of Ratings
Corporate Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PROSPECTUS & APPLICATION
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
INVESTMENT STRATEGY
INCOME
ADVISOR CLASS
ADVISOR
MARCH 1, 1997
FRANKLIN INVESTORS SECURITIES TRUST
This prospectus describes the Advisor Class shares of the Franklin
Short-Intermediate U.S. Government Securities Fund (the "Fund"). It contains
information you should know before investing in the Fund. Please keep it for
future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated March 1, 1997, which may be amended from time to time. It includes
more information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporated by reference into this prospectus. For a free
copy or a larger print version of this prospectus, call 1-800/DIAL BEN or write
the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC 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, JURISDICTION OR COUNTRY 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 DISTRIBUTORS.
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND - ADVISOR CLASS
MARCH 1, 1997
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..................................... 2
How does the Fund Invest its Assets?................ 2
What are the Fund's Potential Risks?................ 6
Who Manages the Fund?............................... 6
How does the Fund Measure Performance?.............. 8
How Taxation Affects the Fund and its Shareholders.. 8
How is the Trust Organized?......................... 9
ABOUT YOUR ACCOUNT
How Do I Buy Shares?................................ 10
May I Exchange Shares for Shares of Another Fund?... 13
How Do I Sell Shares?............................... 14
What Distributions Might I Receive from the Fund?... 16
Transaction Procedures and Special Requirements..... 17
Services to Help You Manage Your Account............ 21
What If I Have Questions About My Account?.......... 22
GLOSSARY
Useful Terms and Definitions........................ 23
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. Since Advisor Class shares were not offered until January 1, 1997, the
table is based on the historical expenses of the Fund's Class I shares for the
fiscal year ended October 31, 1996. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases None
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.56%
Rule 12b-1 Fees None
Other Expenses 0.10%
Total Fund Operating Expenses 0.66%
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$7 $21 $37 $82
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of the class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to provide as high a level of current income
as is consistent with prudent investing while seeking preservation of
shareholder's capital. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval. Of course, there is no assurance
that the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund intends to invest up to 100% of its net assets in U.S. government
securities. As a fundamental policy of the Fund, the Fund must invest at least
65% of its net assets in U.S. government securities. SEC guidelines require at
least 65% of the Fund's total assets be invested in U.S. government securities
and the Fund will follow that policy notwithstanding its fundamental policy. It
is the investment policy of the Fund (which may be changed upon notice to
shareholders) to maintain the average dollar weighted maturity of its portfolio
in a range of two to five years. Within this range, the Fund intends to
emphasize an average weighted maturity of 3 1/2 years or less.
The Fund may invest in obligations either issued or guaranteed by the U.S.
government and its agencies or instrumentalities including, but not limited to:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds; and obligations of U.S. government agencies or instrumentalities such as
Federal Home Loan Banks, Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives (including Central Bank
for Cooperatives), Federal Land Banks, Federal Intermediate Credit Banks,
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation or National Credit Union Administration.
Since inception, the assets of the Fund have been invested solely in direct
obligations of the U.S. Treasury and in repurchase agreements collateralized by
U.S. Treasury obligations. The level of income achieved by the Fund may not be
as high as that of other funds which invest in lower quality, longer-term
securities.
Certain of the U.S. government securities that the Fund may invest in may be
purchased at a discount. These 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 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.
ZERO COUPON BONDS. The Fund may, 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 compounds 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 the Fund) consists of the difference between its face value
at maturity and its cost. These investments experience greater volatility in
market value due to changes in interest rates than debt obligations that 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.
TREASURY INFLATION-INDEXED SECURITIES. The Fund may, consistent with its other
policies, invest a portion of its assets in inflation-indexed securities issued
by the U.S. Treasury. In general, these debt securities are issued with various
maturities and pay interest semi-annually. Their principal value is adjusted for
inflation, as measured by the Consumer Price Index. Their interest payments are
calculated at a fixed percentage rate of the inflation-adjusted principal value
as of the payment date.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys 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 that are deemed creditworthy by Advisers. 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 bank approved by the Board and will be held
pursuant to a written agreement.
OTHER INVESTMENT POLICIES OF THE FUND
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy 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 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 buy securities on a when-issued basis with the intention
of acquiring the securities, it may sell the 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 bank,
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 objective and policies, and not for the purpose of investment
leverage. In when-issued and delayed delivery transactions, the Fund relies on
the seller to complete the transaction. The other party's failure may cause the
Fund to miss a price or yield considered advantageous. Securities purchased on a
when-issued or delayed delivery basis do not generally earn interest until their
scheduled delivery date. The Fund is not subject to any percentage limit on the
amount of its assets which may be invested in when-issued purchase obligations.
CONCENTRATION. The Fund will not invest more than 25% of the value of its total
assets in any one particular industry.
BORROWING. The Fund does not borrow money or mortgage or pledge any of 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
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank 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 may engage in security loan arrangements
with the primary objective of increasing the Fund's income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. 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. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in the value or liquidity of portfolio securities or the
amount of net assets will not be considered a violation of any of the foregoing
policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
The foregoing permissible investments and practices are 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 that are permitted, without limitation, to national banks, federal
savings and loan associations and federal credit unions. Please see the SAI for
more details on the Fund's policies regarding eligible federal credit union
investments.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
INTEREST RATE RISK. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable and may happen again in
the future.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $179 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio since its inception is: Jack Lemein, David Capurro and Tom
Runkel.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a bachelor of science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
David Capurro
Vice President of Advisers
Mr. Capurro holds a master of business administration degree and a bachelor of
science degree in business administration from California State University at
Hayward. Mr. Capurro has been with the Franklin Templeton Group since 1985.
Tom Runkel
Vice President of Advisers
Mr. Runkel is a Chartered Financial Analyst and holds a master of business
administration degree from the University of Santa Clara. He earned his bachelor
of arts degree in political science from the University of California at Davis.
Mr. Runkel has been with the Franklin Templeton Group since 1985. He is a member
of several securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 0.56% of the average monthly net assets of the Fund were paid to
Advisers.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance. The
more commonly used measures of performance are total return, current yield and
current distribution rate.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by Advisor Class. The current distribution rate shows
the dividends or distributions paid to shareholders of Advisor Class. This rate
is usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Net Asset Value of the class.
Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and intends to continue to qualify 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 that you receive 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 you have 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 you have owned Fund shares and regardless of whether the
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated as if received by you on December
31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which you 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 these shares.
You should consult with your tax advisor 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 October 31, 1996, qualified for the dividends received
deduction, and it is not anticipated that any of the current year's dividends
will qualify.
Many states grant tax-free status to dividends paid out to shareholders of
mutual funds from interest income earned by the mutual fund from direct
obligations of the U.S. government, subject in some cases to minimum investment
requirements to be met by the Fund. Investments in repurchase agreements
collateralized by U.S. government securities do not generally qualify for this
purpose. At the end of each calendar year, the Fund will provide you with the
percentage of any dividends paid that may qualify for tax-free status. You
should consult your tax advisor 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 your shares and to
distributions and redemption proceeds received from the Fund.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of these dividends
and distributions.
If you are not considered a U.S. person for federal income taxation purposes,
you should consult with your financial or tax advisor regarding the
applicability of U.S. withholding or other taxes to distributions received by
you from the Fund and the application of foreign tax laws to these
distributions.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Investors Securities Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 16, 1986,
and is registered with the SEC under the 1940 Act. As of January 1, 1997, the
Fund began offering a new class of shares designated Franklin Short-Intermediate
U.S. Government Securities Fund - Advisor Class. All shares outstanding before
the offering of Advisor Class shares have been designated Franklin
Short-Intermediate U.S. Government Securities Fund - Class I. Additional series
and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
As of February 3, 1997, Resources owned of record beneficially more than 25% of
the outstanding shares of the Advisor Class of the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. To open your
account, contact your investment representative or complete and sign the
enclosed shareholder application and return it to the Fund with your check.
MINIMUM
INVESTMENTS*
To Open Your Account $5,000,000
To Add to Your Account $25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares.
To determine if you meet the minimum investment requirement, the amount of your
current purchase is added to the cost or current value, whichever is higher, of
your existing shares in the Franklin Templeton Funds. At least $1 million of
this amount, however, must be invested in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds. The Fund's minimum initial investment
requirement will not apply to purchases by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
2. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Accounts managed by the Franklin Templeton Group
5. The Franklin Templeton Profit Sharing 401(k) Plan
6. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
7. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, and that
(i) are sponsored by an employer with at least 5,000 employees, or (ii)
have plan assets of $50 million or more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion
9. Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for qualification under Section 501 of
the Code, subject to a $1 million initial investment in Advisor Class
shares
10. Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group, if the group as
a whole meets the $5 million minimum investment requirement. A qualified
group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
If you currently own Class I shares of the Fund and you qualify to buy Advisor
Class shares, you may invest your existing Class I shares into the Fund's
Advisor Class by June 30, 1997. If you would like to do this, please send us
written instructions. Generally, for federal income tax purposes, there will be
no recognition of gain or loss on this transaction. You may want to consult with
your tax advisor to determine the effect of this transaction, if any, on state
income taxes.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the purchase price. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you're exchanging
BY PHONE Call Shareholder Services
- If you do not want the ability to exchange by phone to
apply to your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all transactions.
PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON
YOUR ACCOUNT. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i)we believe the Fund would be harmed or unable
to invest effectively or (ii) the Fund receives or anticipates simultaneous
orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. at Net Asset Value. If you
do so and you later decide you would like to exchange into a fund that offers an
Advisor Class, you may exchange your Class I shares for Advisor Class shares of
that fund. You may also exchange your Advisor Class shares for Class Z shares of
Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account owners
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction
may have other requirements.
METHOD STEPS TO FOLLOW
BY PHONE Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and o If the request is $50,000 or less. Institutional
sent to us accounts may exceed $50,000 by completing a separate
the telephone agreement. Call Institutional Services to receive a copy.
redemption
agreement o If there are no share certificates issued for the shares
included with you want to sell or you have already returned them to the
this prospectus) Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 30 days
THROUGH YOUR DEALER Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR
ACCOUNT. If you later decide you would like this option, send us written
instructions signed by all account owners, with a signature guarantee.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade. Capital
gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, or both dividend
and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the reinvestment date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value in many
newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy and sell Advisor Class shares at the Net Asset Value per share. We
calculate it to two decimal places using standard rounding criteria. The Net
Asset Value we use when you buy or sell shares is the one next calculated after
we receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR BEFORE SIGNING. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
These minimums do not apply if you fall within categories 4, 5, 6 or 7 under
"How Do I Buy Shares? - Opening Your Account."
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND ADVISOR CLASS - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. They differ, however, primarily in their sales charge and
expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
Franklin Investors Securities Trust
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Table of Contents
How does the Fund Invest its Assets? ..... 2
What are the Fund's Potential Risks? ..... 7
Investment Restrictions .................. 8
Officers and Trustees .................... 9
Investment Management
and Other Services ...................... 13
How does the Fund Buy
Securities for its Portfolio? ........... 14
How Do I Buy, Sell and
Exchange Shares? ........................ 15
How are Fund Shares Valued? .............. 18
Additional Information on
Distributions and Taxes.................. 19
The Fund's Underwriter ................... 22
How does the Fund
Measure Performance?..................... 24
Miscellaneous Information ................ 26
Financial Statements ..................... 27
Useful Terms and Definitions ............. 27
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The Franklin Global Government Income Fund (the "Fund") is a non-diversified
series of Franklin Investors Securities Trust (the "Trust"), an open-end
management investment company. The Fund's investment objective is to provide
high current income, consistent with preservation of capital; capital
appreciation is a secondary consideration. The Fund seeks to achieve its
objective by investing primarily in debt securities issued by domestic and
foreign governments.
The Prospectus, dated March 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
This SAI is not a prospectus. It contains information in addition to and in more
detail than set forth in the Prospectus. This SAI is intended to provide you
with additional information regarding the activities and operations of the Fund,
and should be read in conjunction with the Prospectus.
Mutual funds, annuities, and other investment products:
o are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other agency of the U.S. government;
o are not deposits or obligations of, or guaranteed or endorsed by, any bank;
o are subject to investment risks, including the possible loss of principal.
How does the Fund Invest its Assets?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
The underlying assets of the Fund may be retained in cash, including cash
equivalents that are Treasury bills, commercial paper and short-term bank
obligations such as CDs, bankers' acceptances and repurchase agreements. It is
intended, however, that only so much of the underlying assets of the Fund be
retained in cash as is deemed desirable or expedient under then-existing market
conditions.
Restricted Securities. The Fund may invest in securities that cannot be offered
to the public for sale without first being registered under the Securities Act
of 1933 ("restricted securities"), or in other securities which, in the opinion
of the Board , may be otherwise illiquid. It is the policy of the Fund, however,
that illiquid securities may not constitute, at the time of purchase, more than
10% of the value of the net assets of the Fund. Generally, an "illiquid"
security is any security that cannot be disposed of promptly and in the ordinary
course of business at approximately the amount at which the Fund has valued the
security. Notwithstanding this limitation, the Board has authorized the Fund to
invest in restricted securities where such investment is consistent with the
Fund's investment objective and has authorized such securities to be considered
liquid to the extent the investment manager determines that there is a liquid
institutional or other market for such securities. For example, restricted
securities that may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed, will be considered liquid
even though such securities have not been registered pursuant to the Securities
Act of 1933.
The Board will review any determination by Advisers to treat a restricted
security as a liquid security on an ongoing basis, including Advisers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, Advisers and the Board will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
U.S. Government Securities. As indicated in the Prospectus, the Fund may invest
in U.S. government securities, which include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. U.S. government securities do not generally involve the
credit risks associated with other types of interest bearing securities, and, as
a result, the yields available from such securities are generally lower than the
yields available from other types of interest bearing securities. Like all
interest bearing securities, however, the market values of U.S. government
securities change as interest rates fluctuate.
There are no restrictions or limitations on investments in obligations of the
United States ("U.S."), or of corporations chartered by the U.S. Congress as
federal government instrumentalities.
Obligations of Developing Countries. Among the foreign securities in which the
Fund may invest will be the fixed-income obligations of governments, government
agencies and corporations of developing countries. As of the date of this SAI,
such opportunities are limited as many developing countries are rescheduling
their existing loans and obligations. However, as restructuring is completed and
economic conditions improve, these obligations may become available at discounts
and offer the Fund the potential for current U.S. dollar income. These
instruments are not traded on any exchange. However, Advisers believes there may
be a market for such securities either in multinational companies wishing to
purchase such assets at a discount for further investment, or from the issuing
governments which may decide to redeem their obligations at a discount.
Interest Rate Swaps. The Fund may participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest rate
obligations, one of which has an interest rate fixed to maturity while the other
has an interest rate that changes in accordance with changes in a designated
benchmark (i.e., London Interbank Offered Rate (LIBOR), prime, commercial paper,
or other benchmarks). The obligations to make repayment of principal on the
underlying securities are not exchanged. These transactions generally require
the participation of an intermediary, frequently a bank. The entity holding the
fixed rate obligation will transfer the obligation to the intermediary, and such
entity will then be obligated to pay to the intermediary a floating rate of
interest, generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity that
has a floating-rate obligation that substantially mirrors the obligation desired
by the first party. In return for assuming a fixed obligation, the second entity
will pay the intermediary all sums that the intermediary pays on behalf of the
first entity, plus an arrangement fee and other agreed upon fees.
Interest rate swaps are generally entered into to permit the party seeking a
floating rate obligation the opportunity to acquire the obligation at a lower
rate than is directly available in the credit market, while permitting the party
desiring a fixed rate obligation the opportunity to acquire a fixed rate
obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed rate obligations at a low enough coupon rate to cover the
cost involved.
Other Fixed-Income Securities. As stated in the Prospectus, the Fund may
purchase fixed-income securities of both domestic and foreign issuers including,
among others, preference stock and all types of long-term or short-term debt
obligations, such as equipment trust certificates, equipment lease certificates,
and conditional sales contracts. Equipment related instruments are used to
finance the acquisition of new equipment. The instrument gives the bond-holder
the first right to the equipment in the event that interest and principal are
not paid when due. Title to the equipment is held in the name of the trustee,
usually a bank, until the instrument is paid off. Equipment related instruments
usually mature over a period of 10 to 15 years. In practical effect equipment
trust certificates, equipment lease certificates and conditional sale contracts
are substantially identical; they differ mainly in legal structure. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
Options On U.S. and Foreign Securities. In an effort to increase current income
and to reduce the fluctuations in Net Asset Value, the Fund intends to write
covered put and call options and buy put and call options on U.S. or foreign
securities that are traded on U.S. and foreign securities exchanges and
over-the-counter markets.
As described in the Prospectus, the Fund may enter into closing transactions to
terminate an options position. The Fund will realize a profit from a closing
transaction if the price of the transaction is less than the premium received
from writing the option or is more than the premium paid to purchase the option;
the Fund will realize a loss from a closing transaction if the price of the
transaction is more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases in the market
price of a call option written by the Fund will generally be inversely related
to the market price of the underlying security, any loss resulting from the
closing out of a call option is likely to be offset in whole or in part by
appreciation in the value of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call will depend upon the expected price
movement of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money")
the current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price for the security and the exercise price. If the options
are not exercised and the price of the underlying security declines, the amount
of such decline will be mitigated by the premium received.
Futures Contracts. The Fund may enter into contracts for the purchase or sale
for future delivery of debt securities or currency ("Futures Contracts"). A
"sale" of a Futures Contract means the acquisition and assumption of a
contractual obligation to deliver the securities or currency called for by the
contract at a specified price on a specified date. A "purchase" of a Futures
Contract means the acquisition of a contractual right and obligation to acquire
the securities or currency called for by the contract at a specified price on a
specified date. U.S. Futures Contracts have been designed by exchanges which
have been designated "contract markets" by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract market. Existing
contract markets for Futures Contracts on debt securities include the Chicago
Board of Trade, the New York Cotton Exchange, the MidAmerica Commodity Exchange
(the "MCE") and the International Money Market of the Chicago Mercantile
Exchange (the "IMM"). Futures Contracts trade on these exchanges, and, through
their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. The Fund will enter
into Futures Contracts that are based on foreign currencies or on debt
securities that are backed by the full faith and credit of the U.S. government,
such as long-term U.S. Treasury bonds, Treasury notes, Government National
Mortgage Association modified pass-through mortgage-backed securities, and
three-month U.S. Treasury bills. The Fund may also enter into Futures Contracts
that are based on corporate securities and non-U.S. government debt securities
when such securities become available.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a Futures
Contract may not have been issued when the contract was written.
Although Futures Contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is terminated before the settlement date of the contract without having to make
or take delivery of the securities or currency. The termination of a contractual
obligation is accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical offsetting Futures Contract calling for
delivery in the same month. Such a transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
underlying security or currency. Since all transactions in the futures market
are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, the Fund will incur brokerage fees
when it purchases or sells Futures Contracts.
To the extent the Fund enters into a Futures Contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the Futures Contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The Futures Contract will be marked-to-market daily. Should
the value of the Futures Contract decline relative to the Fund's position, the
Fund will be required to pay to the futures commission merchant an amount equal
to such change in value. The Fund may also cover its futures position by holding
a call option on the same Futures Contract permitting the Fund to purchase the
instrument or currency at a price no higher than the price established in the
Futures Contract which it sold.
The purpose of the purchase or sale of a Futures Contract by the Fund is to
attempt to protect the Fund from fluctuations in interest or currency exchange
rates without actually buying or selling long-term, fixed-income securities or
currency. For example, if the Fund owns long-term bonds, and interest rates were
expected to increase, the Fund might enter into Futures Contracts for the sale
of debt securities. Such a sale would have much the same effect as selling an
equivalent value of the long-term bonds owned by the Fund. If interest rates did
increase, the value of the debt securities owned by the Fund would decline, but
the value of the Futures Contracts to the Fund would increase at approximately
the same rate, thereby keeping the Net Asset Value of the Fund from declining as
much as it otherwise would have. The Fund could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is often more liquid than the cash (securities) market, the use of Futures
Contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities. Similarly, if the Fund
expects that a foreign currency in which its securities are denominated will
decline in value against the U.S. dollar, the Fund may sell Futures Contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an increase
in the value of the Fund's futures position.
Alternatively, when it is expected that interest rates may decline, Futures
Contracts may be purchased in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of Futures Contracts should be similar to that of long-term bonds, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the Futures Contracts could be liquidated and the Fund could then buy
long-term bonds on the cash (securities) market. Similarly, if the Fund intends
to acquire a security or other asset denominated in a currency that is expected
to appreciate against the U.S. dollar, the Fund may purchase Futures Contracts
on that currency. If the value of the foreign currency does appreciate, the
increase in the value of the futures position will offset the increased U.S.
dollar cost of acquiring the asset denominated in that currency.
The ordinary spreads between prices in the cash (securities) or foreign currency
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets are
subject to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close Futures
Contracts through offsetting transactions which could distort the normal
relationship between the cash (securities) or foreign currency and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by Advisers may still not result in a successful hedging transaction.
Options on Futures Contracts. The Fund intends to purchase and write options on
Futures Contracts for hedging purposes only. The purchase of a call option on a
Futures Contract is similar in some respects to the purchase of a call option on
an individual security or currency. Depending on the pricing of the option
compared to either the price of the Futures Contract upon which it is based or
the price of the underlying debt securities or currency, it may or may not be
less risky than direct ownership of the Futures Contract of the underlying debt
securities or currency. As with the purchase of Futures Contracts, when the Fund
is not fully invested it may purchase a call option on a Futures Contract to
hedge against a market advance due to declining interest rates or appreciation
in the value of a foreign currency against the U.S. dollar.
If the Fund writes a call option on a Futures Contract and the futures price at
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium which may provide a partial hedge against any
decline that may have occurred in the value of the Fund's portfolio holdings. If
the futures price at expiration of the option is higher than the exercise price,
the Fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its portfolio securities.
The Fund's ability to engage in the options on futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options on futures are relatively new and still developing, and it is
impossible to predict the amount of trading interest that may exist in various
types of options on futures. Therefore, no assurance can be given that the Fund
will be able to utilize these instruments effectively for the purposes set forth
above. Furthermore, the Fund's ability to engage in options on futures
transactions may be limited by tax considerations.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Futures Contracts on foreign currencies, or Forward Contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of the
securities, the Fund may purchase call options on such currency. The purchase of
options could offset, at least partially, the effects of the adverse movements
in currency exchange rates. As with other types of options, however, the benefit
the Fund derives from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options that would require the Fund to forego a portion or all of the benefits
of advantageous changes in such rates.
The Fund may also write options on foreign currencies for hedging purposes. For
example, where the Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to adverse fluctuations in currency exchange
rates the Fund could, instead of purchasing a put option, write a call option on
the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency. If currency exchange rates increase as
projected, the put option will expire unexercised and the premium received will
offset the increased cost. As with other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium received, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss, which
may not be fully offset by the amount of the premium received. As a result of
writing options on foreign currencies, the Fund may also be required to forego
all or a portion of the benefits that might otherwise have been obtained from
favorable changes in currency exchange rates.
All call options written on foreign currencies will be covered. A call option on
foreign currencies written by the Fund is "covered" if the Fund owns (or has an
absolute right to acquire) the underlying foreign currency covered by the call.
A call option is also covered if the Fund has a call on the same foreign
currency in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash and U.S. government securities
in a segregated account with its custodian.
The Fund proposes to take advantage of investment opportunities in the area of
options, Futures Contracts and options on Futures Contracts that are not
presently contemplated for use by the Fund or that are not currently available
but which may be developed in the future, to the extent such opportunities are
both consistent with the Fund's investment objective and policies and are
legally permissible transactions for the Fund. These opportunities, if they
arise, may involve risks that are different from those involved in the options
and futures activities described above.
Loan Participations. The Fund may invest in loan participations, which may have
speculative characteristics. The Fund may purchase loan participations at par or
which sell at a discount because of the borrower's credit problems. To the
extent the borrower's credit problems are resolved, the loan participation may
appreciate in value but not beyond par value.
The Manager may acquire loan participations that sell at a discount, from time
to time, when it believes the investments offer the possibility of long-term
appreciation in value in addition to current income. An investment in loan
participations carries a high degree of risk and may have the consequence that
interest payments with respect to such securities may be reduced, deferred,
suspended or eliminated and may have the further consequence that principal
payments may likewise be reduced, deferred, suspended or cancelled, causing the
loss of the entire amount of the investment. Loans will generally be acquired by
the Fund from a bank, finance company or other similar financial services entity
("Lender").
Loan participations are interests in floating or variable rate senior loans
("Loans") to U.S. corporations, partnerships and other entities ("Borrowers"),
which operate in a variety of industries and geographical regions. The Fund will
purchase participation interests in Loans that may pay interest at rates which
are periodically redetermined on the basis of a base lending rate plus a
premium. These base lending rates are generally the Prime Rate offered by a
major U.S. bank, the London Inter-Bank Offered Rate, the CD rate or other base
lending rates used by commercial lenders. The Loans typically have the most
senior position in a Borrower's capital structure, although some Loans may hold
an equal ranking with other senior securities of the Borrower. Although the
Loans generally are secured by specific collateral, the Fund may invest in Loans
that are not secured by any collateral. Uncollateralized Loans pose a greater
risk of nonpayment of interest or loss of principal than do collateralized
Loans. The collateral underlying a collateralized Loan may consist of assets
that may not be readily liquidated, and there is no assurance that the
liquidation of such assets would fully satisfy a Borrower's obligation under a
Loan. The Fund is not subject to any restrictions with respect to the maturity
of the Loans in which it purchases participation interests.
Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although Advisers may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative factor
in Advisers' analysis.
Loans are not readily marketable and may be subject to restrictions on resale.
Participation interests in Loans generally are not listed on any national
securities exchange or automated quotation system and no regular market has
developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Fund expects to purchase interests
are of a relatively large principal amount and are held by a relatively large
number of owners which, in Advisers' opinion, should enhance the relative
liquidity of such interests.
When acquiring a loan participation, the Fund will have a contractual
relationship only with the Lender (typically an entity in the banking, finance
or financial services industries), not with the Borrower. The Fund has the right
to receive payments of principal and interest to which it is entitled only from
the Lender selling the loan participation and only upon receipt by the Lender of
payments from the Borrower. In connection with purchasing loan participations,
the Fund generally will have no right to enforce compliance by the Borrower with
the terms of the Loan Agreement, nor any rights with respect to any funds
acquired by other Lenders through set-off against the Borrower and the Fund may
not directly benefit from the collateral supporting the Loan in which it has
purchased the loan participation. As a result, the Fund may assume the credit
risk of both the Borrower and the Lender selling the loan participation. In the
event of the insolvency of the Lender selling a loan participation, the Fund may
be treated as a general creditor of the Lender, and may not benefit from any
set-off between the Lender and the Borrower.
What are the Fund's Potential Risks?
Options On U.S. and Foreign Securities. The writing of covered put options is
similar in terms of risk/return characteristics to buy-and-write transactions.
If the market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the Fund's gain will be
limited to the premium received. If the market price of the underlying security
declines or otherwise is below the exercise price, the Fund may elect to close
the position or wait for the option to be exercised and take delivery of the
security at the exercise price. The Fund's return will be the premium received
from the put option minus the amount by which the market price of the security
is below the exercise price. Out-of-the-money, at-the-money, and in-the-money
put options may be used by the Fund in the same market environments that call
options are used in equivalent buy-and-write transactions.
In addition to the matters discussed in the Prospectus, you should be aware that
when trading options on foreign exchanges or in the over-the-counter market many
of the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the Fund as an option writer could lose amounts substantially in
excess of its initial investment, due to the margin and collateral requirements
associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation ("OCC"), thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
In regard to the Fund's option trading activities, it intends to comply with the
California Corporate Securities Rules as they pertain to prohibited investments.
The Fund's option trading activities may result in the loss of principal under
certain market conditions.
Futures Contracts. Futures Contracts entail certain risks. Although the Fund
believes that the use of Futures Contracts will benefit the Fund, if Advisers'
investment judgment about the general direction of interest or currency exchange
rates is incorrect, the Fund's overall performance would be poorer than if it
had not entered into any such contract. For example, if the Fund has hedged
against the possibility of an increase in interest rates that would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
the bonds which it has hedged because it will have offsetting losses in its
futures positions. Similarly, if the Fund sells a foreign currency Futures
Contract and the U.S. dollar value of the currency unexpectedly increases, the
Fund will lose the beneficial effect of the increase on the value of the
security denominated in that currency. In addition, in such situations, if the
Fund has insufficient cash, it may have to sell bonds from its portfolio to meet
daily variation margin requirements. Sales of bonds may be, but are not
necessarily, at increased prices which reflect the rising market. The Fund may
have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The amount of risk the Fund assumes when it
purchases an option on a Futures Contract is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the value
of the underlying Futures Contract will not be fully reflected in the value of
the option purchased. The Fund will purchase a put option on a Futures Contract
only to hedge the Fund's portfolio against the risk of rising interest rates or
the decline in the value of securities denominated in a foreign currency.
Additional Risks of Forward Contracts, Options on Foreign Currencies and Options
on Futures Contracts. Forward Contracts are not traded on contract markets
regulated by the CFTC or by the SEC. The ability of the Fund to use forward
contracts could be restricted to the extent that Congress authorized the CFTC or
the SEC to regulate such transactions. Forward Contracts are traded through
financial institutions acting as market-makers.
The purchase and sale of exchange-traded foreign currency options is subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, margins of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events.
Futures Contracts on currencies, options on Futures Contracts and options on
foreign currencies may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions could also be adversely
affected by (i) other foreign political and economic factors, (ii) less
available data than in the U.S. on which to base trading decisions, (iii) delays
in the Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the U.S., (iv) the imposition of exercise and
settlement terms and procedures, and margin requirements different from those in
the U.S., and (v) lesser trading volume.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that it may borrow from banks, for temporary or emergency purposes, up to 30% of
its total assets and pledge up to 30% of its total assets in connection
therewith. (No new investments will be made by the Fund while any outstanding
borrowings exceed 5% of its total assets.)
2. Buy any securities on "margin," except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities and except that the Fund may make margin deposits in connection
with Futures Contracts and Options on Futures Contracts.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
portfolio securities of the Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 30% of the value of the Fund's total assets
(taken at market value) at the time of the most recent loan. Also, entry into
repurchase agreements is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 25% of its assets in the securities of issuers in any one
industry, other than foreign governments.
6. Purchase from or sell any portfolio securities to its officers and trustees,
or any firm of which any officer or trustee is a member, as principal, except
that the Fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; retain securities of any issuer, if to the knowledge of
the Fund, one or more of its officers, trustees or the investment manager own
beneficially more than one-half of 1% of the securities of such issuer and all
such persons together own beneficially more than 5% of such securities.
7. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
8. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
9. Invest in interests in oil, gas or other mineral exploration or development
programs.
10. Invest in companies for the purpose of exercising control or management.
11. Purchase securities of other investment companies.
12. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures contracts, forward contracts or repurchase transactions.
13. Make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such securities
or securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to, the
securities sold short ("short sales against the box"), and unless not more than
10% of the Fund's net assets (taken at market value) is held as collateral for
such sales at any one time.
(Restriction Nos. 7, 11 and 12 are not fundamental policies of the Fund and may
be changed by the trustees without shareholder approval.)
Pursuant to an undertaking given to the Texas State Securities Board, the Fund
may not invest in real estate limited partnerships or in interests (other than
publicly traded equity securities) in oil, gas, or other mineral leases,
exploration or development so long as the Fund's shares are offered for sale in
the state of Texas.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Trust under the 1940 Act, are indicated by an asterisk (*).
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director, trustee or managing
general partner, as the case may be, of
32 of the investment companies in the
Franklin Templeton Group
of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and
Chairman of the Board, General Host
Corporation (nursery and craft
centers); Director, RBC Holdings, Inc.
(a bank holding company) and Bar-S
Foods (a meat packing company); and
director, trustee or managing general
partner, as the case may be, of 56 of
the investment companies in the
Franklin Templeton Group of Funds.
Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; Director of
General Host Corporation; director,
trustee or managing general partner, as
the case may be, of 58 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant
Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture
capital company); and director, trustee
or managing general partner, as the
case may be, of 31 of the investment
companies in the Franklin Templeton
Group of Funds.
*Edward B. Jamieson (48) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Senior Vice President and Portfolio
Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of
five of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin
Resources, Inc.; Chairman of the Board
and Director, Franklin Advisers, Inc.
and Franklin Templeton Distributors,
Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General
Host Corporation; and officer and/or
director, trustee or managing general
partner, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
Rupert H. Johnson, Jr. (56) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director,
Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President
and Director, Franklin Advisers, Inc.;
Senior Vice President and Director,
Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services,
Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer
and/or director, trustee or managing
general partner, as the case may be, of
most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of
the investment companies in the
Franklin Templeton Group of Funds.
Frank W.T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates
and Miller & LaHaye, which are General
Partners of Peregrine Ventures and
Peregrine Ventures II (venture capital
firms); Chairman of the Board and
Director, Quarterdeck Office Systems,
Inc. (software firm); Director,
FischerImaging Corporation (medical
imaging systems); and director or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation
(information and financial services);
Director, Fund American Enterprises
Holdings, Inc. (financial services),
MCI Communications Corporation, CCC
Information Services Group, Inc.
(information services), MedImmune, Inc.
(biotechnology), Source One Mortgage
Services Corporation (financial
services), Shoppers Express (home
shopping), Spacehab, Inc. (aerospace
services); and director, trustee or
managing general partner, as the case
may be, of 53 of the investment
companies in the Franklin Templeton
Group of Funds; formerly Chairman,
Hambrecht and Quist Group (venture
capital and investment banking);
Director, H & Q Healthcare Investors
(investment trust); and President,
National Association of Securities
Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and
Director, Franklin Resources, Inc.;
Executive Vice President and Director,
Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin
Advisers, Inc. and Franklin Templeton
Services, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the
case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer
and/or director or trustee of 61 of the
investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial
Officer and Treasurer, Franklin
Resources, Inc.; President, Franklin
Templeton Services, Inc.; Executive
Vice President, Templeton Worldwide,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc. and
Franklin Templeton Distributors, Inc.;
Senior Vice President,
Franklin/Templeton Investor Services,
Inc.; Treasurer, Franklin Advisory
Services, Inc. and Franklin Investment
Advisory Services, Inc.; officer of
most of the other subsidiaries of
Franklin Resources, Inc.; and officer,
director and/or trustee of 61 of the
investment companies in the Franklin
Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General
Counsel, Franklin Resources, Inc.;
Senior Vice President, Franklin
Templeton Services, Inc., Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc.,
Franklin Advisory Services, Inc.,
Franklin Investment Advisory Services,
Inc., and officer of 61 of the
investment companies in the Franklin
Templeton Group of Funds.
Charles E. Johnson (40) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director,
Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton
Distributors, Inc.; President and
Director, Templeton Worldwide, Inc.
and Franklin Institutional Services
Corporation; officer and/or director,
as the case may be, of some of the
subsidiaries of Franklin Resources,
Inc. and officer and/or director or
trustee, as the case may be, of 39
of the investment companies in the
Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.;
and officer of 38 of the investment
companies in the Franklin Templeton
Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales
Manager, Franklin Templeton
Distributors, Inc.; and officer of 33
of the investment companies in the
Franklin Templeton Group
of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$925 per month plus $925 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
Total Fees Number of Boards
Received from in the Franklin
Total Fees the Franklin Templeton Group
Received from Templeton of Funds on Which
Name the Trust* Group of Funds** Each Serves***
Frank H. Abbott, III.... $21,275 $165,236 32
Harris J. Ashton........ 21,275 343,591 56
S. Joseph Fortunato..... 21,275 360,411 58
David Garbellano........ 21,275 148,916 31
Frank W.T. LaHaye....... 20,350 139,233 27
Gordon S. Macklin....... 21,275 335,541 53
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 236
Class I shares, or less than 1% of the total outstanding shares of the Fund.
Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
Investment Management and Other Services
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers is covered by fidelity insurance on its officers, directors
and employees for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
Under an agreement with Advisers, TICI is the Fund's sub-advisor. TICI provides
Advisers with investment management advice and assistance. Under the
sub-advisory agreement, the sub-advisor provides, subject to Advisers'
discretion, a portion of the investment advisory services for which Advisers is
responsible pursuant to the management agreement. These responsibilities may
include managing a portion of the Fund's investments and supplying research
services. Research services provided by the sub-advisor may include information,
analytical reports, computer screening studies, statistical data and factual
resumes pertaining to securities throughout the world. This supplemental
research, when utilized, is subject to analysis by Advisers before being
incorporated into the investment advisory process. The sub-advisory agreement
provides that the sub-advisor may also select brokers and dealers for execution
of the Fund's portfolio transactions consistent with the Fund's brokerage
policies.
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on net assets of the Fund in excess of $100
million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1% per
year) of net assets of the Fund in excess of $250 million. The fee is computed
at the close of business on the last business day of each month. Each class pays
its proportionate share of the management fee. Under the sub-advisory agreement,
Advisers pays TICI a sub-advisory fee, in U.S. dollars, equal to a rate of 0.35%
of the average daily net assets up to and including $100 million of net assets
of the Fund; 0.25% of average daily net assets over $100 million up to and
including $250 million; and 0.20% of average daily net assets over $250 million.
This fee is not a separate expense of the Fund but is paid by Advisers from the
management fees it receives from the Fund.
For the fiscal years ended October 31, 1994, 1995 and 1996, management fees
totaling $1,130,298, $984,273 and $866,730, respectively, were paid to Advisers.
For the same periods, Advisers paid TICI sub-advisory fees of $244,263, $530,209
and $473,601, respectively.
Management Agreements. The management and sub-advisory agreements are in effect
until February 28, 1998. They may continue in effect for successive annual
periods if their continuance is specifically approved at least annually by a
vote of the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, and in either event by a majority vote of the
Board members who are not parties to either agreement or interested persons of
any such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the Fund's outstanding voting securities, or by Advisers on 30 days' written
notice, and will automatically terminate in the event of its assignment, as
defined in the 1940 Act. The sub-advisory agreement may be terminated without
penalty at any time by the Board or by vote of the holders of a majority of the
Fund's outstanding voting securities, or by either Advisers or TICI on not less
than 60 days' written notice, and will automatically terminate in the event of
its assignment, as defined in the 1940 Act.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
Shareholder Servicing Agent. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Trust's independent auditors. During the fiscal year ended
October 31, 1996, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
How does the Fund Buy
Securities for its Portfolio?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. The Fund seeks to obtain prompt execution
of orders at the most favorable net price. Transactions may be directed to
dealers in return for research and statistical information, as well as for
special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, consistent with
internal policies the sale of Fund shares, as well as shares of other funds in
the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid no
brokerage commissions. As of October 31, 1996, the Fund did not own securities
of its regular broker-dealers.
How Do I Buy, Sell and Exchange Shares?
Additional Information on Buying Shares
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
Under $30,000................... 3%
$30,000 but less than $100,000.. 2%
$100,000 but less than $400,000. 1%
$400,000 or more................ 0%
Other Payments to Securities Dealers. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75% on
sales of $1 million to $2 million, plus 0.60% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Letter of Intent. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Reinvestment Date. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
Additional Information on Exchanging Shares
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell 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 occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
Additional Information on Selling Shares
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day for Class I shares and on the prior
business day for Class II shares. If the processing dates are different, the
date of the Net Asset Value used to redeem the shares will also be different for
Class I and Class II shares.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
General Information
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
How are Fund Shares Valued?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers.
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 before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Net Asset Value of each class is not calculated. Thus, the calculation
of the Net Asset Value of each class does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
Additional Information on
Distributions and Taxes
Distributions
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of 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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the prior fiscal year.
The Fund may make more than one distribution derived from net short-term and net
long-term capital gains in any year or adjust the timing of these distributions
for operational or other reasons.
Taxes
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, the portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the deduction will be declared by the Fund annually in a notice
to shareholders mailed shortly after the end of the Fund's fiscal year.
Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by a
Fund as a dividend will not qualify for the dividends received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that its distributions will be sufficient to
avoid any or all federal excise taxes.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Group of Funds 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. You
should consult with your tax advisors concerning the rules applicable to the
redemption or exchange of Fund shares.
Gain realized by the Fund from transactions entered into after April 30, 1993
that are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount". A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent the
applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.
The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse, or closing out of the
option or sale of the underlying stock or security. By contrast, the Fund
treatment of certain other options, futures and forward contracts entered into
by the Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contacts and
options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and time of income distributed to shareholders by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of short
term capital losses into long-term capital losses. Certain tax elections exist
for mixed straddles (i.e., straddles comprised of at least one Section 1256
position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income").
This requirement may limit the Fund's ability to engage in options, straddles,
hedging transactions and forward or futures contracts because these transactions
are often consummated in less than three months, may require the sale of
portfolio securities held less than three months and may, as in the case of
short sales of portfolio securities reduce the holding periods of certain
securities within the Fund, resulting in additional short-short income for the
Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn its distributions to shareholders.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and also conform to the aforementioned
30% gross income test. Foreign exchange gains derived by a Fund with respect to
the Fund's business of investing in stock or securities, or options or futures
with respect to such stock or securities, is qualifying income for purposes of
this 90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Series does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income on a portion of any "excess distribution" it receives from the PFIC or
any gain it derives from the disposition of such shares, even if such income is
distributed as a taxable dividend by the Fund to its U.S. shareholders. The Fund
may also be subject to additional interest charges in respect of deferred taxes
arising from such distributions or gains. Any federal income tax paid by the
Fund as a result of its ownership on shares of a PFIC will not give rise to a
deduction or credit to the Fund or to any shareholder. A PFIC means any foreign
corporation if, for the taxable year involved, either (i) it derives at least 75
percent of its income from "passive income" (including, but not limited to,
interest, dividends, royalties, rents and annuities), or (ii) on average, at
least 50 percent of the value (or adjusted basis, if elected) of the assets held
by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by such countries. If
more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible and intends to elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. Pursuant to this election, you will be
required to include in gross income (in addition to taxable dividends actually
received) your pro rata share of the foreign taxes paid by the Fund, and will be
entitled either to deduct (as an itemized deduction) your pro rata share of
foreign income and similar taxes in computing your taxable income or to use it
as a foreign tax credit against your U. S. Federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed by you if you do
not itemize deductions, but you may be eligible to claim the foreign tax credit
(see below). You will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass through" for
that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed your U.S. tax attributable to your foreign source taxable income. For
this purpose, if the pass-through election is made, the source of the Fund's
income flows through to its shareholders. With respect to the Fund, gains from
the sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be treated
as ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as defined for
purposes of the foreign tax credit), including the foreign source passive income
passed through by the Fund. You may be unable to claim a credit for the full
amount of your proportionate share of the foreign taxes paid by the Fund.
Foreign taxes may not be deducted in computing alternative minimum taxable
income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If the Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by the Fund will be treated as U.S.
source income.
The Fund's Underwriter
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board, or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the underwriting agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The underwriting agreement terminates automatically in
the event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were reinvested at the
Offering Price and Distributors allowed 50% of the entire commission to the
Securities Dealer of record, if any, on an account. Starting with any income
dividends paid after April 30, 1994, this reinvestment is at Net Asset Value.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended October 31, 1994, 1995 and 1996 were
$1,226,772, $388,327 and $27,589, respectively. After allowances to dealers,
Distributors retained $63,571, $4,942 and $293 in net underwriting discounts and
commissions and received $0, $24 and $813 in connection with redemptions or
repurchases of shares, for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan for each class, as discussed below.
Except as noted, Distributors received no other compensation from the Fund for
acting as underwriter.
The Rule 12b-1 Plans
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, the Fund may pay up to a maximum of
0.15% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual fees
payable under the plan will be equal to the sum of: (i) the amount obtained by
multiplying 0.15% by the average daily net assets represented by Class I shares
of the Fund that were acquired by investors on or after May 1, 1994, the
effective date of the plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented by Class I shares
of the Fund that were acquired before May 1, 1994 ("Old Assets"). These fees
will be paid to the current Securities Dealer of record on the 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 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 Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear 12b-1 expenses at the
same rate. The initial rate will be at least 0.07% (0.05% plus 0.02%) of the
average daily net assets of Class I and, as Class I shares are sold on or after
May 1, 1994, will increase over time. Thus, as the proportion of Class I shares
purchased on or after May 1, 1994, increases in relation to outstanding Class I
shares, the expenses attributable to payments under the plan will also increase
(but will not exceed 0.15% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Class I plan, the
plan permits the Board to allow the Fund to pay a full 0.15% on all assets at
any time. The approval of the Board would be required to change the calculation
of the payments to be made under the Class I plan.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plan, the Fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
The Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers or by vote of a majority of the outstanding
shares of the class. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended October 31, 1996, Distributors had eligible
expenditures of $141,314 and $29,407 for advertising, printing, and payments to
underwriters and broker-dealers pursuant to the Class I and Class II plans,
respectively, of which the Fund paid Distributors $135,388 and $13,423 under the
Class I and Class II plans.
How does the Fund Measure Performance?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. Regardless of
the method used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical period
used.
Total Return
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions are reinvested at
Net Asset Value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
The average annual total returns for Class I shares for the one-, five-year and
since inception (March 15, 1988) periods ended October 31, 1996, were 7.04%,
6.43% and 7.49%, respectively. The average annual total returns for Class II
shares for the one-year and since inception (May 1, 1995) periods ended October
31, 1996, were 9.14% and 11.43%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof).
Cumulative Total Return. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods, or fractional portion
thereof. The cumulative total returns for Class I shares for the one-, five-year
and since inception (March 15, 1988) periods ended October 31, 1996, were 7.04%,
36.58% and 86.57%, respectively. The cumulative total returns for the Class II
shares of the Fund for the one-year and since inception (May 1, 1995) periods to
October 31, 1996, were 9.14% and 17.66%, respectively.
Yield
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended October 31, 1996, was 6.05% for Class I and 5.78% for Class II.
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
Current Distribution Rate
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of a
class. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains and is calculated over a different period of time. The current
distribution rate for each class for the 30-day period ended October 31, 1996,
was 6.64% for Class I and 6.45% for Class II.
Volatility
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
Other Performance Quotations
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
Comparisons
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
d) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
e) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
f) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
g) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
h) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
i) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
j) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
k) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index or component indices - The Aggregate Bond Index measures yield,
price, and total return for Treasury, Agency, Corporate, Mortgage and Yankee
bonds.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Yields and total return of other taxable investments including certificates
of deposit (CDs), money market deposit accounts (MMDAs), checking accounts,
savings accounts, money market mutual funds and repurchase agreements.
n) Yields of other countries' government and corporate bonds as compared to U.S.
Government and corporate bonds to illustrate the potentially higher returns
available outside the United States.
o) Salomon Brothers World Government Bond Index covers the available market for
domestic Government bonds worldwide. It includes all fixed-rate bonds with a
remaining maturity of one year or longer with amounts outstanding of at least
the equivalent of $25 million dollars. The index provides an accurate,
replicable fixed income benchmark for market performance. Returns are in local
currency.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
Miscellaneous Information
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.6 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
As of February 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
Share
Name and Address Amount Percentage
NFSCFEBO
Mark C. Yahle
1565 Sea Gull Drive
Titusville, Fl 32796 22,564.325 5.862%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II.
Prospectus - The prospectus for the Fund's Class I and Class II shares dated
March 1, 1997, as may be amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
How does the Fund Invest its Assets?............... 2
Investment Restrictions............................ 5
Officers and Trustees.............................. 6
Investment Management
and Other Services................................ 10
How does the Fund Buy
Securities for its Portfolio?..................... 11
How Do I Buy, Sell and Exchange Shares?............ 12
How are Fund Shares Valued?........................ 16
Additional Information on
Distributions and Taxes........................... 16
The Fund's Underwriter............................. 19
How does the Fund Measure Performance?............. 22
Miscellaneous Information.......................... 25
Financial Statements............................... 26
Useful Terms and Definitions....................... 26
Appendix
Description of Ratings............................ 27
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of five separate diversified series and one
non-diversified series and may separately or collectively be referred to
hereafter as the "Fund" or the "Funds." This SAI describes Class I shares of the
Franklin Short-Intermediate U.S. Government Securities Fund (the
"Short-Intermediate Fund"), Class I and Class II shares of the Franklin
Convertible Securities Fund (the "Convertible Fund"), and Class I and Class II
shares of the Franklin Equity Income Fund, formerly the Franklin Special Equity
Income Fund (the "Equity Income Fund").
Separate Prospectuses for each Fund, dated March 1, 1997, as may be amended from
time to time, contains the basic information you should know before investing in
the Fund. For a free copy, call 1-800/DIAL BEN or write the Fund at the address
shown.
The Short-Intermediate Fund currently offers another class of shares with a
different sales charge and expense structure, which affects performance. This
class is described in a separate SAI and prospectus. For more information,
contact your investment representative or call 1-800/DIAL BEN.
The Short-Intermediate Fund's investment objective is to provide as high a level
of current income as is consistent with prudent investing while seeking
preservation of shareholders' capital. The Short-Intermediate Fund seeks to
achieve its objective by investing in a portfolio of U.S. government securities
with primary emphasis on securities with remaining maturities of 31/2 years or
less.
The Convertible Fund's 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 Convertible Fund seeks
to achieve this objective by investing primarily in convertible securities as
described in detail in its Prospectus.
The Equity Income Fund's investment objective is to maximize total return
through emphasis on high current income and long-term capital appreciation,
consistent with reasonable risk. The Equity Income Fund seeks to achieve its
objective by investing primarily in common and preferred stocks with above
average dividend yields.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
Options. As stated in their respective Prospectuses, the Convertible Fund and
the Equity Income Fund may write covered call options and purchase call and put
options on securities. These Funds may also purchase call and put options on
stock indices in order to hedge against the risk of market or industry wide
stock price fluctuations. Call and put options on stock indices are similar to
options on exchange-traded securities, except that, rather than the right to
purchase or sell stock at a specified price, options on a stock index give the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the underlying stock index is greater than (or less than in
the case of puts) the exercise price of the option. This amount of cash is equal
to the difference between the closing price of the index and the exercise price
of the option, expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash and gain or loss depends on
price movements in the stock market generally (or in a particular industry or
segment of the market on which the index is based), rather than price movements
in individual stocks.
Call options written by these Funds give the holder the right to buy the
underlying security from the Fund at a stated exercise price upon exercising the
option at any time prior to its expiration. A call option written by the Fund is
"covered" if the Fund owns or has an absolute right (such as by conversion) to
the underlying security covered by the call. A call option is also covered if
the Fund holds a call on the same security and in the same principal amount as
the call written and the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
U.S. government securities or other high grade debt obligations in a segregated
account with its custodian bank.
When the Fund writes or sells covered call options, it will receive a cash
premium that can be used in whatever way is felt to be most beneficial to the
Fund. The risks associated with covered option writing are that in the event of
a price rise on the underlying security which would likely trigger the exercise
of the call option, the Fund will not participate in the increase in price
beyond the exercise price. It will generally be the Fund's policy, in order to
avoid the exercise of a call option written by it, to cancel its obligation
under the call option by entering into a "closing purchase transaction," if
available, unless it is determined to be in the Fund's interest to deliver the
underlying securities from its portfolio. A closing purchase transaction
consists of the Fund purchasing an option having the same terms as the option
written by the Fund, and has the effect of canceling the Fund's position as a
writer. The premium the Fund will pay in executing a closing purchase
transaction may be higher or lower than the premium it received when writing the
option, depending in large part upon the relative price of the underlying
security at the time of each transaction.
One risk involved in both the purchase and sale of options is that the Fund may
not be able to effect a closing purchase transaction at a time when it wishes to
do so (or at an advantageous price). There is no assurance that a liquid market
will exist for a given option at any particular time. To mitigate this risk, the
Fund will ordinarily purchase and write options only if a secondary market for
the option exists on a national securities exchange or in the over-the-counter
market. Another risk is that during the option period, if the Fund has written a
covered call option, it will have given up the opportunity to profit from a
price increase in the underlying securities above the exercise price in return
for the premium on the option (although the premium can be used to offset any
losses or add to the Fund's income) but, as long as its obligation as a writer
continues, the Fund will have retained the risk of loss should the price of the
underlying security decline. In addition, the Fund has no control over the time
when it may be required to fulfill its obligation as a writer of the option;
once the Fund has received an exercise notice, it cannot effect a closing
transaction in order to terminate its obligation under the option and must
deliver the underlying securities at the exercise price. The aggregate premiums
paid on all options held at any time will not exceed any applicable state
regulations that may limit the aggregate value of securities underlying
outstanding options.
In the case of put options, the Fund's gain will be reduced by the amount of the
premium and transaction costs it paid and may be offset by a decline in the
value of its portfolio securities. If the value of the underlying stock index
never exceeds the exercise price (or never declines below the exercise price in
the case of put options), the Fund may suffer a loss equal to the amount of the
premium it paid, plus transaction costs. The Fund may also close out its option
positions before they expire by entering into a closing purchase transaction as
discussed above. Risks may also arise because the correlation between movements
in the index and the price of the securities underlying the options is
imperfect, and this risk increases as the composition of the Fund's portfolio
diverges from the composition of the relevant index.
Foreign Securities. As noted in their Prospectuses, the Convertible and Equity
Income Funds may invest in foreign securities, generally by purchasing those
traded in the U.S. or by purchasing American Depositary Receipts ("ADRs"). The
Funds may also purchase the securities of foreign issuers directly in foreign
markets so long as in Advisers' judgment, an established public trading market
exists.
Securities which are acquired by the Funds outside of 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 Funds to be illiquid assets if (a)
the Funds reasonably believe they can readily dispose of the securities for cash
in the U.S. or foreign market or (b) current market quotations are readily
available. The Fund will not acquire the securities of foreign issuers outside
of the U.S. under circumstances where, at the time of acquisition, the Fund has
reason to believe that it could not resell the securities in a public trading
market. Investors should recognize that foreign securities are often traded with
less frequency and volume, and therefore may have greater price volatility, than
is the case with many U.S. securities. Notwithstanding the fact that the Fund
intends to acquire the securities of foreign issuers only where there are public
trading markets, investments by the Fund in the securities of foreign issuers
may tend to increase the risks with respect to the liquidity of the Fund's
portfolio and the Fund's ability to meet a large number of shareholders'
redemption requests should there be economic or political turmoil in a country
in which the Funds have their assets invested or should relations between the
U.S. and a foreign country deteriorate markedly.
The Fund's investment in foreign Securities present special risks and
considerations not typically associated with investments in securities issued by
U.S. issuers. Such risks include: reductions of income as a result of foreign
taxes; fluctuation in value of foreign portfolio investments due to changes in
currency rates and control regulations (e.g., currency blockage); transaction
charges for currency exchange; lack of information about foreign governments;
lack of uniform accounting, auditing and financial reporting standards
comparable to those applicable to the U.S. government; less volume on foreign
exchanges than on U.S. exchanges; greater volatility and less liquidity on
foreign markets than in U.S. companies; less regulation of foreign issuers,
stock exchanges and brokers than in the U.S.; greater difficulty in commencing
lawsuits; higher brokerage commission rates than in the U.S.; increased risk of
delays in settlement of portfolio transactions or loss of certificates for
portfolio securities because of the lesser speed and reliability of mail
service; possibilities of expropriation, confiscatory taxation, political,
financial or social instability or adverse diplomatic developments; and
differences (which may be favorable or unfavorable) between the U.S. economy and
foreign economies.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign investments.
Credit Union Investment Regulations. This section summarizes the
Short-Intermediate Fund's investment policies, under which, in the opinion of
the Fund and based on the Fund's understanding of laws and regulations governing
investments by federal credit unions on September 30, 1996, the Fund would be a
permissible investment for federal credit unions. CREDIT UNION INVESTORS ARE
ADVISED TO CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE WHETHER AND TO WHAT
EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
All investments of the Fund will be subject to the following limitations:
(a) The Fund will invest only in (1) obligations of, or securities guaranteed as
to principal and interest by, the U.S. government or its agencies and
instrumentalities, (2) time and savings deposits in financial institutions whose
accounts are insured by the FDIC, and (3) mortgage related securities.
Mortgage-related securities are interests or participations in, or other
securities secured by, first mortgages initiated by state or federally regulated
or HUD-approved lenders, and are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. The Fund does not intend to invest in time and savings deposits or
mortgage related securities.
(b) All purchases and sales of securities will be settled on a cash basis within
30 days of the trade date. The Fund, however, may agree to settle a purchase or
sale transaction on a specific date up to 120 days after the trade date if, on
the trade date, the Fund has cash flow projections evidencing its ability to
complete the purchase or the Fund owns the security it has agreed to sell.
(c) Any repurchase agreements, in which the Fund purchased U.S. government
securities subject to resale to a bank or dealer at an agreed-upon price and
date, would be subject to these conditions: the value of the U.S. government
securities will equal or exceed the initial price of the repurchase agreement,
plus interest; and a custodian of the Fund will hold the U.S. government
securities in an account for the benefit of the Fund.
(d) Although the Fund does not currently intend to invest in reverse repurchase
agreements, in the event that the Fund were to engage in such transactions, the
Fund would, in addition to abiding by its fundamental policies and the
regulations of the Securities and Exchange Commission ("SEC") with respect to
borrowing, engage in reverse repurchase transactions involving only securities
with maturity dates earlier than the closing date of the reverse repurchase
agreement.
(e) The Fund will not engage in (1) futures or options transactions; (2) short
sales; or (3) purchases of zero-coupon bonds that mature more than ten years
after the purchase date.
(f) Although the Fund does not intend, as of the date of this SAI, to invest in
derivative mortgage-backed securities, such as collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"),
which represent non-proportional interests ("tranches" or "classes") in pools of
mortgage loans, any investments by the Fund in such securities would be subject
to the following conditions. In general, the Fund may only invest in CMOs or
REMICs that either: (1) based on testing, at the time of purchase and at least
annually thereafter, have an average life that would be extended or shortened by
less than 6 years under modeling scenarios where mortgage commitment rates
immediately rise or fall 300 basis points; or (2) have an adjustable rate which
(i) resets at least annually, (ii) may rise to a maximum allowable rate at least
300 basis points above the rate at the time of purchase, and (iii) adjusts
directly with (rather than inversely to or as a multiple of) the interest rate
index on which it is based. In addition, the Fund may hold derivative
mortgage-backed securities which fail these tests at the time of investment or
at the time of any subsequent test, provided that the securities are held solely
to reduce interest rate risk and that the Fund confirms on a quarterly basis
that the security will reduce the Fund's interest rate risk, using a monitoring
and reporting system that enables the Fund to evaluate the actual and expected
performance of the security under different interest rate scenarios.
Other Policies. There are no restrictions or limitations on investments in
obligations of the U.S., or of corporations chartered by Congress as federal
government instrumentalities. In the case of each Fund, the underlying assets
may be retained in cash, including cash equivalents which are Treasury bills,
commercial paper and short-term bank obligations such as CDs, bankers'
acceptances and repurchase agreements. It is intended, however, that only so
much of the underlying assets of the Fund be retained in cash as is deemed
desirable or expedient under then-existing market conditions.
The Short-Intermediate Fund may buy securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, such as the Government National
Mortgage Association ("GNMA"), which carries a guarantee backed by the full
faith and credit of the U.S. Treasury. GNMA may borrow from the U.S. Treasury to
the extent needed to make payments under its guarantee. No assurances can be
given, however, that the U.S. government will provide financial support to the
obligations of the other U.S. government agencies or instrumentalities in which
the Fund may invest, since it is not obligated to do so. These agencies and
instrumentalities are supported by either the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury, the discretionary
authority of the U.S. government to purchase certain obligations of an agency or
instrumentality, or the credit of the agency or instrumentality.
Illiquid Securities. The Fund may invest up to 10% of its net assets in illiquid
securities, a term which means securities that cannot be disposed of within
seven days in the normal course of business at approximately the amount at which
the Fund has valued the securities and includes, among other things, repurchase
agreements of more than seven days duration, over-the-counter options and the
assets used to cover such options, and other securities which are not readily
marketable. Investments in savings deposits are generally considered illiquid
and will, together with other illiquid investments, not exceed 10% of the Fund's
total net assets. Notwithstanding this limitation, the Trust's Board of Trustees
(the "Board") has authorized the Fund to invest in securities that cannot be
offered to the public for sale without first being registered under the
Securities Act of 1933, as amended (the "1933 Act") ("restricted securities"),
where such investment is consistent with the Fund's investment objective and has
authorized such securities to be considered liquid to the extent Advisers
determines that there is a liquid institutional or other market for such
securities.
For example, restricted securities that may be freely transferred among
qualified institutional buyers pursuant to Rule 144A under the 1933 Act, and for
which a liquid institutional market has developed will be considered liquid even
though such securities have not been registered pursuant to the 1933 Act. The
Board will review any determination by Advisers to treat a restricted security
as a liquid security on an ongoing basis, including Adviser's assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, Advisers and the Board will take into account the following factors:
(i) the frequency of trades and quotes for the security; (ii) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in that Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts. The Short-Intermediate Fund has not purchased and does not
intend currently to purchase illiquid or restricted securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short," except that
the Convertible Fund may sell securities "short against the box" on the terms
and conditions described in its Prospectus.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of the Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of that Fund's total assets
at the time of the most recent loan. The entry into repurchase agreements is not
considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of the Fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer. To the
extent permitted by exemptions granted under the 1940 Act, the Funds may invest
in shares of money market funds managed by Advisers or its affiliates.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer if, to the knowledge of the Trust, one or more
of its officers, trustees or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs; however, the Convertible Fund and the
Equity Income Fund may write call options which are listed for trading on a
national securities exchange and purchase put options on securities in their
portfolios (see "How does the Fund Invest its Assets?" in each Prospectus). The
Convertible Fund and the Equity Income Fund may also purchase call options to
the extent necessary to cancel call options previously written and may purchase
listed call options provided that the value of the call options purchased will
not exceed 5% of the Fund's net assets. Such Funds may also purchase call and
put options on stock indices for defensive hedging purposes. (The Equity Income
Fund will comply with the California Corporate Securities Rules as they pertain
to prohibited investments.) At present, there are no options listed for trading
on a national securities exchange covering the types of securities which are
appropriate for investment by the Short-Intermediate Fund and, therefore, there
are no option transactions available for that Fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; or except to the extent
the Funds invest their uninvested daily cash balances in shares of the Franklin
Money Fund and other money market funds in the Franklin Group of Funds provided
i) their purchases and redemptions of such money fund shares may not be subject
to any purchase or redemption fees, ii) their investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the Fund's shares (as determined under Rule 12b-1, as amended under
the federal securities laws) and iii) provided aggregate investments by the Fund
in any such money fund do not exceed (A) the greater of (i) 5% of the Fund's
total net assets or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money fund.
13. Issue senior securities, as defined in the 1940 Act, except that this
restriction will not prevent the Funds from entering into repurchase agreements
or making borrowings, mortgages and pledges as permitted by restriction #1
above.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
Restriction No. 9 above does not prevent the Funds from investing in real estate
investment trusts ("REITs") if that meet the investment objective and policies
of the Fund. The Equity Income Fund, as noted in its Prospectus, may invest up
to 10% of its net assets in REITs.
Pursuant to an undertaking given to the Texas State Securities Board, the
Convertible Fund and the Equity Income Fund may not invest in warrants (valued
at the lower of cost or market) in excess of 5% of the value of the Fund's net
assets. No more than 2% of the value of the Fund's net assets may be invested in
warrants (valued at the lower of cost or market) that are not listed on the New
York or American Stock Exchanges. In addition, the Convertible Fund may not
invest in real estate limited partnerships or in interests (other than publicly
traded equity securities) in oil, gas, or other mineral leases, exploration or
development.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund, under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director, trustee
or managing general partner, as the case may be, of 56 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (82) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 31 of the investment companies in the
Franklin Templeton Group of Funds.
*Edward B. Jamieson (48) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of five of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 57 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (56) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 61 of the investment companies in the Franklin Templeton
Group of Funds.
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.
(software firm); Director, FischerImaging Corporation (medical imaging systems);
and director or trustee, as the case may be, of 27 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information and financial services);
Director, Fund American Enterprises Holdings, Inc. (financial services), MCI
Communications Corporation, CCC Information Services Group, Inc. (information
services), MedImmune, Inc. (biotechnology), Source One Mortgage Services
Corporation (financial services), Shoppers Express (home shopping), Spacehab,
Inc. (aerospace service); and director, trustee or managing general partner, as
the case may be, of 53 of the investment companies in the Franklin Templeton
Group of Funds; formerly Chairman, Hambrecht and Quist Group (venture capital
and investment banking); Director, H & Q Healthcare Investors (investment
trust); and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton
Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee of 61 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; President, Franklin Templeton Services, Inc., Executive Vice
President, Templeton Worldwide, Inc.; Senior Vice President and Treasurer,
Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin/Templeton Investor Services, Inc.; Treasurer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.; officer
of most other subsidiaries of Franklin Resources, Inc.; and officer, director
and/or trustee of 61 of the investment companies in the Franklin Templeton Group
of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc., and officer of 61
of the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (40) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 39 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
The table above shows the officers and Board members who are also affiliated
with Distributors and Advisers. Nonaffiliated members of the Board are currently
paid fees of $925 per month plus $925 per meeting attended. As shown above, some
of the nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
Total Fees Number of Boards in
Total Fees Received from the the Franklin Templeton
Received Franklin Templeton Group of Funds on
Name from Trust* Group of Funds** Which Each Serves***
Frank H. Abbott, III....... $21,275 $165,236 32
Harris J. Ashton........... 21,275 343,591 56
S. Joseph Fortunato........ 21,275 360,411 58
David Garbellano........... 21,275 148,916 31
Frank W.T. LaHaye.......... 20,350 139,233 27
Gordon S. Macklin.......... 21,275 335,541 53
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 164
shares of the Convertible Fund-Class I, 1,975 shares of the Equity Income
Fund-Class I and 188 shares of the Short-Intermediate Fund-Class I, or less than
1% of the total outstanding shares of each Fund's Class I shares. Many of the
Board members also own shares in other funds in the Franklin Templeton Group of
Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers is covered by fidelity insurance on its officers, directors
and employees for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on net assets of the Fund in excess of $100
million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1% per
year) of net assets of the Fund in excess of $250 million. The fee is computed
at the close of business on the last business day of each month. Each class of
the Equity Income Fund and Convertible Fund pays its proportionate share of the
management fee.
During certain periods, over the last three fiscal years, Advisers has agreed in
advance to limit its management fees for each of the Funds. For the fiscal years
ended October 31, 1994, 1995 and 1996, the management fees, before any advance
waiver, and the amounts paid by the Funds were as follows:
Management Management
Fees Before Fees
Fund Waiver Paid
1996
Short-Intermediate
Fund............ $1,142,250 $1,142,250
Convertible Fund. 699,454 699,454
Equity Income Fund 1,251,297 1,251,297
1995
Short-Intermediate
Fund............ 1,187,800 1,187,800
Convertible Fund. 453,492 453,492
Equity Income Fund 754,194 738,214
1994
Short-Intermediate
Fund............ 1,370,071 1,308,206
Convertible Fund. 373,354 327,355
Equity Income Fund 437,330 312,644
The management agreement is in effect until February 28, 1997. It may continue
in effect for successive annual periods if its continuance is specifically
approved at least annually by a vote of the Board or by a vote of the holders of
a majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the management
agreement or interested persons of any such party (other than as members of the
Board), cast in person at a meeting called for that purpose. The management
agreement may be terminated without penalty at any time by the Board or by a
vote of the holders of a majority of the Fund's outstanding voting securities,
or by Advisers on 30 days' written notice, and will automatically terminate in
the event of its assignment, as defined in the 1940 Act.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
Shareholder Servicing Agent. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Trust's independent auditors. During the fiscal year ended
October 31, 1996 their auditing services consisted of rendering an opinion on
the financial statements of the Funds included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
Since most purchases by the Short-Intermediate Fund are principal transactions
at net prices, the Fund incurs little or no brokerage costs. The
Short-Intermediate Fund deals directly with the selling or buying principal or
market maker without incurring charges for the services of a broker on its
behalf, unless it is determined that a better price or execution may be obtained
by using the services of a broker. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask prices. The Short-Intermediate Fund seeks to obtain prompt execution of
orders at the most favorable net price. Transactions may be directed to dealers
in return for research and statistical information, as well as for special
services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, consistent with
internal policies the sale of Fund shares, as well as shares of other funds in
the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid
total brokerage commissions as follows:
Fund 1994 1995 1996
Short-Intermediate
Fund......... $0 $0 $0
Convertible
Fund......... 13,958 29,731 84,758
Equity Income
Fund.........113,782 167,560 293,423
As of October 31, 1996, none of the Funds owned securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares of the Convertible and the Equity Income Funds may be offered with the
following schedule of sales charges:
Size of Purchase - U.S. dollars Sales Charge
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
Shares of the Short-Intermediate Fund may be offered with the following schedule
of sales charges:
Size of Purchase - U.S. dollars Sales Charge
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
Other Payments to Securities Dealers. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more of Class I shares of the
Convertible and Equity Income Funds: 1% on sales of $1 million to $2 milion,
plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more of Class I shares of the
Short-Intermediate Fund of $1 million or more: 0.75% on sales of $1 million to
$2 million, plus 0.60% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Letter of Intent. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
(the "Letter") section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based on purchases
in more than one Franklin Templeton Fund will be effective only after
notification to Distributors that the investment qualifies for a discount. Your
holdings in the Franklin Templeton Funds acquired more than 90 days before the
Letter is filed, will be counted towards completion of the Letter but will not
be entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13-month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending upon the amount actually purchased
(less redemptions) during the period. The upward adjustment does not apply to
certain retirement plans. If you execute a Letter before a change in the sales
charge structure of the Fund, you may complete the Letter at the lower of the
new sales charge structure or the sales charge structure in effect at the time
the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If the total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Reinvestment Date. Shares of the Convertible and Equity Income Funds acquired
through the reinvestment of dividends will be purchased at the Net Asset Value
determined on the business day following the dividend record date (sometimes
known as the "ex-dividend date"). The processing date for the reinvestment of
dividends may vary and does not affect the amount or value of the shares
acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your Short-Intermediate 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. If you
request the exchange of the total value of your Convertible Fund or Equity
Income Fund account, declared but unpaid income dividends and capital gain
distributions will be exchanged into the new fund and will be invested at Net
Asset Value. Backup withholding and information reporting may apply. Information
regarding the possible tax consequences of an exchange is included in the tax
section in this SAI and in the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell 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 occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day for Class I shares and on the prior
business day for Class II shares. If the processing dates are different, the
date of the Net Asset Value used to redeem the shares will also be different for
Class I and Class II shares.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time) each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers.
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 before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Net Asset Value of each class. If events materially affecting the values
of these foreign securities occur during this period, the securities will be
valued in accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally 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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the prior fiscal year.
The Fund may make more than one distribution derived from net short-term and net
long-term capital gains in any year or adjust the timing of these distributions
for operational or other reasons. 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.
TAXES
As stated in the Prospectuses, the Fund has elected and qualified to be treated
as a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations the stock in which is
not debt-financed by the Fund and is held for at least a minimum holding period)
are less than 100% of its distributable income, then the amount of the Fund's
dividends paid to corporate shareholders which may be designated as eligible for
the deduction will not exceed the aggregate qualifying dividends received by the
Fund for the taxable year. The amount or percentage of income qualifying for the
deduction for distributions made during the calendar year will be declared by
the Fund annually in a notice to shareholders mailed shortly after the end of
the calendar year.
Corporate shareholders should note that dividends paid by the Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
the Fund as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund's shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in your tax basis in its Fund
shares, under certain circumstances, if the shares have been held for less than
two years. Corporate shareholders whose investment in the Fund is "debt
financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to you by December 31 of each year in order to avoid the
imposition of a federal excise tax. The Funds intend as a matter of policy to
declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but do not guarantee
that your distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. Gain or loss will be recognized in an amount
equal to the difference between your basis in the shares and the amount realized
from the transaction, subject to the rules described below. If such shares are a
capital asset in your hands, gain or loss will be capital gain or loss and will
be long-term for federal income tax purposes if the shares have been held for
more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent you buy other shares of the Fund (through reinvestment
of dividends or otherwise) within 30 days before or after such redemption. Any
loss disallowed under these rules will be added to your tax basis of the shares
purchased.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of 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 Funds 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. You should consult
with your tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
Gain realized by the Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate, and
is reduced by any prior recharacterizations under this provision or Section
263(g) of the Code concerning capitalized carrying costs.
Transactions in options by the Convertible and Equity Income Funds, including
written covered calls and purchased calls and put options, are subject to
special rules which may affect the amount, timing and character of distributions
to shareholders by: accelerating income to such Funds; deferring Fund losses;
causing adjustments in the holding periods of Fund securities; converting
capital gains into ordinary income; and converting short-term capital losses
into long-term capital losses. For example, equity options, including options on
stock and on narrow-based stock indices, will be subject to tax under Section
1234 of the Code, and the purchase of a put option may constitute a short sale
for federal income tax purposes, causing an adjustment in the holding period of
the underlying stock or a substantially identical stock in the Fund's portfolio.
The tax treatment of certain other options, such as listed options on
broad-based stock indices or on debt securities, is governed by Section 1256 of
the Code, in the case that such options are held by the foregoing Funds. In
general, each such Section 1256 position held by the Fund will be
marked-to-market (i.e., treated as if it were closed out) on the last business
day of each taxable year of the Fund, and all gain or loss associated with such
marking-to-market or other transactions in such positions will be treated as 60%
long-term and 40% short-term capital gain or loss.
When either the Convertible Fund or the Equity Income Fund hold options or
contracts which substantially diminish such Fund's risk of loss with respect to
another position of the Fund (as might occur in some hedging transactions), this
combination of positions could be treated as a "straddle" for tax purposes,
resulting in possible deferral of losses, adjustments in the holding periods of
Fund securities and conversion of short-term capital losses into long-term
capital losses.
As a regulated investment company, each Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income").
This requirement may limit the Convertible and Equity Income Funds' ability to
engage in options, straddles, and hedging transactions because these
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities, reduce the holding periods of certain
securities within these Funds, resulting in additional short-short income for
the Fund. The Fund will monitor its transactions in such options and may make
certain other tax elections in order to mitigate the effect of the above rules
and to prevent disqualification of the Fund as a regulated investment company
under Subchapter M of the Code.
The Convertible and Equity Income Funds are each authorized to invest in foreign
securities (see the discussion in each Fund's Prospectus under "How does the
Fund Invest its Assets?"). While neither Fund currently makes such investments,
if Advisers makes the decision to invest a portion of the Fund's portfolio in
such securities, these investments may have the following tax consequences.
The Convertible and Equity Income Funds may be subject to foreign withholding
taxes on income from certain of their foreign securities. Because both Funds
will likely invest 50% or less of their total assets in securities of foreign
corporations, neither will be entitled under the Code to pass through to their
shareholders their pro rata share of the foreign taxes paid by the Fund. These
taxes will be taken as a deduction by the Fund that paid the tax. Foreign
exchange gains and losses, if any, realized by either Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and, in turn, its distributions to shareholders.
If either the Convertible Fund or the Equity Income Fund owns shares in a
foreign corporation that constitutes a "passive foreign investment company" (a
"PFIC") for federal income tax purposes and the Fund does not elect to treat the
foreign corporation as a "qualified electing fund" within the meaning of the
Code, the Fund may be subject to U.S. federal income tax on a portion of any
"excess distribution" it receives from the PFIC or any gain it derives from the
disposition of such shares, even if such income is distributed as a taxable
dividend by the Fund to its U.S. shareholders. These Funds may also be subject
to additional interest charges in respect of deferred taxes arising from such
distributions or gains. Any federal income tax paid by the Fund as a result of
its ownership of shares of a PFIC will not give rise to a deduction or credit to
the Fund or to any shareholder. A PFIC means any foreign corporation if, for the
taxable year involved, either (i) it derives at least 75 percent of its income
from "passive income" (including, but not limited to, interest, dividends,
royalties, rents and annuities), or (ii) on average, at least 50 percent of the
value (or adjusted basis, if elected) of the assets held by the corporation
produce "passive income".
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. The
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends for Class I shares were reinvested at the
Offering Price and Distributors allowed 50% of the entire commission to the
Securities Dealer of record, if any, on an account. Starting with any income
dividends paid after April 30, 1994, this reinvestment is at Net Asset Value.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions received by Distributors and after allowances to dealers and, the
amounts retained by Distributors in net underwriting discounts and commissions
and the amount received in connection with redemptions or repurchases of shares
for the fiscal years ended October 31, 1994, 1995 and 1996 were as follows:
Compensation Received
Commissions Commissions on Redemptions
Fiscal Year Ended October 31: Received Retained and Repurchases
1996
Short-Intermediate Fund.......... $ 229,997 $ 29,004 --
Convertible Fund................. 1,132,135 117,440 $1,285
Equity Income Fund............... 1,819,338 186,833 1,595
1995
Short-Intermediate Fund.......... 248,800 31,768 --
Convertible Fund................. 458,575 51,364 --
Equity Income Fund............... 1,255,780 142,848 --
1994
Short-Intermediate Fund.......... 641,082 96,507 --
Convertible Fund................. 465,108 18,675 --
Equity Income Fund............... 697,331 36,015 --
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I of the Short-intermediate Fund and Class I and II of the Convertible and
Equity Income Funds have adopted separate distribution plans or "Rule 12b-1
plans" pursuant to Rule 12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plans, the Convertible and Equity Income
Funds may each pay up to a maximum of 0.25% per year of Class I's average daily
net assets, and the Short Intermediate Fund may pay up to a maximum of 0.10% of
its average daily net assets, for expenses incurred in the promotion and
distribution of Class I shares.
In implementing the Class I plans, the Board has determined that the annual fees
payable by the Convertible and Equity Income Funds under the plans will be equal
to the sum of: (i) the amount obtained by multiplying 0.25% by the average daily
net assets represented by Class I shares of the Fund that were acquired by
investors on or after May 1, 1994, the effective date of the plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average daily
net assets represented by Class I shares of the Fund that were acquired before
May 1, 1994 ("Old Assets"). The annual fee payable by the Short-Intermediate
Fund will be (i) 0.10% of New Assets and 0.05% of Old Assets. These fees will be
paid to the current Securities Dealer of record on the account. In addition,
until such time as the maximum payment is reached on a yearly basis, up to an
additional 0.05% will be paid by the Convertible and Equity Income Funds and an
additional 0.02% by the Short-Intermediate Fund to Distributors under the plans.
The payments 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 Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.20% (0.15% plus 0.05%) for
the Convertible and Equity Income Funds and 0.07% for the Short Intermediate
Fund, of the average daily net assets of Class I and, as Class I shares are sold
on or after May 1, 1994, will increase over time. Thus, as the proportion of
Class I shares purchased on or after May 1, 1994, increases in relation to
outstanding Class I shares, the expenses attributable to payments under the plan
will also increase (but will not exceed 0.25% per year of the Convertible Fund
and Equity Income Fund Class I average daily net assets and 0.10% of the Short
Intermediate Fund's average daily net assets.) While this is the currently
anticipated calculation for fees payable under the Class I plan, the plan
permits the Board to allow the Fund to pay the maximum fee under the plan on all
assets at any time. The approval of the Board would be required to change the
calculation of the payments to be made under the Class I plans.
The Class I plans do not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plans, the Equity Income and Convertible
Funds each pay Distributors up to 0.75% per year of Class II's average daily net
assets, payable quarterly, for distribution and related expenses. These fees may
be used to compensate Distributors or others for providing distribution and
related services and bearing certain Class II expenses. All distribution
expenses over this amount will be borne by those who have incurred them without
reimbursement by the Fund.
Under the Class II plans, the Equity Income and Convertible Funds also pay an
additional 0.25% per year of the Class II's average daily net assets, payable
quarterly, as a servicing fee.
The Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Funds, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plans. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers or by vote of a majority of the outstanding
shares of the class. Distributors or any dealer or other firm may also terminate
their respective distribution or service agreement at any time upon written
notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended October 31, 1996, Distributors had eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the Class I plans of $193,427, $272,855 and $581,022
for the Short-Intermediate Fund, the Convertible Fund and the Equity Income
Fund, respectively. The Fund paid Distributors $162,959, $255,268 and $521,746,
for the Short-Intermediate Fund, the Convertible Fund and the Equity Income
Fund, respectively under the Class I plan. For the fiscal year ended October 31,
1996, Distributors had eligible expenditures for advertising, printing, and
payments to underwriters and broker-dealers pursuant to the Class II plans of
$111,468 and $190,471 for the Convertible and the Equity Income Fund,
respectively. The Fund paid Distributors $44,937 and $75,604 for the Convertible
Fund and the Equity Income Fund, respectively under the Class II plan.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. Regardless of
the method used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical period
used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions are reinvested at
Net Asset Value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
average annual total return for each class for the indicated periods ended
October 31, 1996 were as follows:
One- Five- From
Fund Name Year Year Inception
CLASS I
Short-Intermediate
Fund* 2.59% 5.45% 6.85%
Convertible Fund* 11.46% 13.72% 10.81%
Equity Income
Fund** 10.10% 12.43% 12.20%
CLASS II
Convertible Fund+ 13.67% 10.55%
Equity Income Fund+ 12.35% 10.75%
*Inception 4/15/87
**Inception 3/15/88
+Inception 10/1/95
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
Cumulative Total Return. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods, or fractional portion
thereof. The cumulative total return for each Fund and class for the indicated
periods ended on October 31, 1996 were as follows:
One- Five- From
Fund Name Year Year Inception
CLASS I
Short-Intermediate
Fund* 2.59% 30.38% 88.18%
Convertible Fund* 11.46% 90.16% 166.43%
Equity Income
Fund** 10.10% 79.65% 170.10%
CLASS II
Convertible Fund+ 13.67% 11.46%
Equity Income Fund+ 12.35% 11.67%
*Inception 4/15/87
**Inception 3/15/88
+Inception 10/1/95
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended on October 31, 1996, was as follows:
CLASS I
Short-Intermediate Fund....... 5.10%
Convertible Fund.............. 4.19%
Equity Income Fund............ 3.67%
CLASS II
Convertible Fund.............. 3.57%
Equity Income Fund............ 3.04%
The figures were obtained using the following SEC formula:
6
Yield = 2[(a-b + 1) - 1]
cd
where:
a =dividends and interest earned during the period
b =expenses accrued for the period (net of reimbursements)
c =the average daily number of shares outstanding during the period that were
entitled to receive dividends
d =the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of a
class. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by the class during a certain period
and dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rate for each class for the 30-day period ended October 31, 1996,
was as follows:
CLASS I
Short-Intermediate Fund........ 5.48%
Convertible Fund............... 4.26%
Equity Income Fund............. 3.63%
CLASS II
Convertible Fund............... 3.19%
Equity Income Fund............. 2.58%
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market,
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average,
over a specified period of time. The idea is that greater volatility means
greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
f) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
g) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
h) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
i) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
j) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
k) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
l) Savings and Loan Historical Interest Rates -
as published in the U.S. Savings & Loan League Fact Book.
m) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate and mortgage bonds.
n) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
o) Lehman Brothers Aggregate Bond Index or its component indices - the Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage and Yankee bonds.
p) Standard & Poor's Bond Indices - measure yield and price of Corporate,
Municipal and Government bonds.
q) Other taxable investments, including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds and repurchase agreements.
r) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
s) Donoghue's Money Fund Report - industry
averages for seven-day annualized and compounded yields of taxable, tax-free and
government money funds.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
In promoting the sale of Fund shares, advertisements or information for the Fund
may also include quotes from Benjamin Franklin, especially Poor Richard's
Almanac.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals, such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.6 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
The Short-Intermediate Fund is eligible for investment by the National Marine
Fisheries Service Capital Construction Funds.
As of February 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
FRANKLIN SHORT-INTERMEDIATE U.S.
GOVERNMENT SECURITIES FUND-CLASS I
City of Scottsdale
Attn: Mark Kockman
3939 Civic Center Boulevard
Scottsdale, AZ 85251-4433 1,137,806.495 15.87%
FRANKLIN SHORT-INTERMEDIATE U.S.
GOVERNMENT SECURITIES FUND-ADVISOR CLASS
Key Clearing Corporation
A/C 5249-3090
4900 Tiedeman Road
Brooklyn, OH 44144 587.524 22.97%
Franklin Resources, Inc.
Corporate Treasury
1850 Gateway Dr., 6th Flr.
San Mateo, CA 94404 1961.498 76.70%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust for the fiscal year ended October 31, 1996, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Certain funds in the Franklin Templeton
Funds offer three classes of shares, designated "Class I," "Class II," and
"Advisor Class." The three classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge and expense
structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for the Convertible Fund and Equity Income Fund
for Class I and 1% for Class II for those Funds and 2.25% for the
Short-Intermediate Fund.
PROSPECTUS - The prospectus for the Fund dated March 1, 1997, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS PAGE
How does the Fund Invest its Assets?.............. 2
Investment Restrictions........................... 3
Officers and Trustees............................. 5
Investment Management and Other Services.......... 9
How does the Portfolio Buy Securities?............ 10
How Do I Buy, Sell and Exchange Shares?........... 11
How are Fund Shares Valued?....................... 14
Additional Information on
Distributions and Taxes.......................... 14
The Fund's Underwriter............................ 15
How does the Fund Measure Performance?............ 17
Miscellaneous Information......................... 20
Financial Statements.............................. 21
Useful Terms and Definitions...................... 21
Appendices
Summary of Procedures to
Monitor Conflicts of Interest................... 22
Description of Ratings........................... 22
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The Franklin Adjustable U.S. Government Securities Fund (the "Adjustable U.S.
Government Fund") and Franklin Adjustable Rate Securities Fund (the "Adjustable
Rate Securities Fund") are diversified series of Franklin Investors Securities
Trust (the "Trust"), an open-end management investment company. Each fund may
also be referred to, separately or collectively, as the "Fund" or "Funds."
The investment objective of the Adjustable U.S. Government Fund is to seek a
high level of current income, consistent with lower volatility of principal. The
Adjustable U.S. Government Fund seeks to achieve its objective by investing all
of its assets in shares of the U.S. Government Adjustable Rate Mortgage
Portfolio (the "Mortgage Portfolio"), which in turn invests primarily in
adjustable rate mortgage securities ("ARMS") or other securities collateralized
by or representing an interest in mortgages. All mortgage securities that the
Portfolio invests in will be issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
The investment objective of the Adjustable Rate Securities Fund is to seek a
high level of current income, consistent with lower volatility of principal than
a fund that invests in fixed-rate securities. The Adjustable Rate Securities
Fund seeks to achieve its objective by investing all of its assets in shares of
the Adjustable Rate Securities Portfolio (the "Securities Portfolio"), which in
turn invests primarily in adjustable rate securities, collateralized by or
representing an interest in mortgages, including ARMS, and other adjustable rate
asset-backed securities. These securities are issued or guaranteed by private
institutions or by the U.S. government, its agencies or instrumentalities. The
Securities Portfolio will only invest in securities rated at least AA by S&P or
Aa by Moody's or, if unrated, will be deemed to be of comparable quality by
Advisers.
The Prospectus, dated March 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Portfolios may buy and their investment policies. You should read it
together with the section in the Prospectus entitled "How does the Fund Invest
its Assets?"
The investment policies of each Fund, fundamental and nonfundamental, are
substantially similar to those described below with respect to the Mortgage
Portfolio and Securities Portfolio (collectively, the "Portfolios") except that,
in all cases, each Fund is permitted to pursue its policies by investing in an
open-end management investment company with the same investment objective and
substantially similar policies and restrictions as the Fund. Any additional
exceptions are noted below.
The Portfolios may invest without limitation in obligations of the U.S.
government or corporations chartered by Congress as federal government
instrumentalities. The Portfolios may buy securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, such as those issued by the
Government National Mortgage Association ("GNMA"). No assurances can be given,
however, that the U.S. government will provide financial support to the
obligations of other U.S. government agencies or instrumentalities in which the
Portfolios invest, since it is not obligated to do so. These agencies and
instrumentalities are supported by either the issuer's right to borrow an
amount, limited to a specific line of credit from the U.S. Treasury, the
discretionary authority of the U.S. government to purchase certain obligations
of an agency or instrumentality, or the credit of the agency or instrumentality.
Several of the Franklin Templeton Funds, including the Portfolios, are major
buyers of government securities. Advisers will seek to negotiate attractive
prices for such securities and pass on any savings from these negotiations to
shareholders in the form of higher current yields.
Floaters. The Securities Portfolio may invest up to 5% of its total assets in
inverse floaters. Inverse floaters are instruments with floating or variable
interest rates that move in the opposite direction, at an accelerated speed, to
short-term interest rates. The Securities Portfolio may also invest up to 5% of
its assets in super floaters. These are instruments that float at a greater than
1 to 1 ratio with the London Interbank Offered Rate ("LIBOR") and are used as a
hedge against the risk that LIBOR floaters become "capped" and can no longer
float higher.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs"). The Portfolios may each invest in CMOs and REMICs issued or
guaranteed by U.S. government agencies or instrumentalities. The Securities
Portfolio may also invest in CMOs and REMICs issued by other entities such as
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers. These privately issued CMOs
and REMICs include obligations that are collateralized by (a) mortgage
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA") or GNMA, (b) pools of mortgages
that are guaranteed by an agency or instrumentality of the U.S. government, or
(c) pools of mortgages that are not guaranteed by an agency or instrumentality
of the U.S. government and that may or may not be guaranteed by the private
issuer. The Mortgage Portfolio will not invest in privately issued CMOs or
REMICs except to the extent that it invests in the securities of entities that
are instrumentalities of the U.S. government.
Asset-Backed Securities. The Securities Portfolio may invest a portion of its
assets in asset-backed securities. The rate of the principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets. The rate of payments may be affected by
economic and various other factors. Therefore, the yield may be difficult to
predict and actual yield to maturity may be more or less than the anticipated
yield to maturity. The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying the securities, how
well the entities issuing the securities are insulated from the credit risk of
the originator or affiliated entities, and the amount of credit support provided
to the securities.
Credit supported asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, these
securities may contain elements of credit support. Credit support falls into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from the ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
due on the underlying pool is timely. Protection against losses resulting from
ultimate default enhances the likelihood of payments of the obligations on at
least some of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the
transaction, or through a combination of these approaches. The Securities
Portfolio will not pay any additional fees for credit support, although the
existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal and
interest, with the result that defaults on the underlying assets are borne first
by the holders of the subordinated class), creation of "reserve funds" (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"overcollateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payments of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in the issue.
Illiquid Investments. The Portfolios may each invest up to 10% of their net
assets in illiquid securities [securities that cannot be disposed of within
seven days in the normal course of business at approximately the amount at which
the Portfolios have valued them, securities with legal or contractual
restrictions on resale (although the Portfolios may each invest in such
securities to the extent permitted under the federal securities laws),
repurchase agreements of more than seven days duration, and other securities
that are not readily marketable].
Cash and Cash Equivalents. The underlying assets of the Portfolios may be
retained in cash, including cash equivalents which are Treasury bills,
commercial paper and short-term bank obligations such as certificates of
deposit, bankers' acceptances and repurchase agreements. The Portfolios intend,
however, to retain in cash only as much of their underlying assets as is
considered desirable or expedient under existing market conditions.
The Portfolios may not invest in real estate limited partnerships or in
interests (other than publicly traded equity securities) in oil, gas, or other
mineral leases, exploration or development.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. Each Fund may not:
1. Borrow money or mortgage or pledge any of the assets of Franklin Investors
Securities Trust (the "Trust"), except that borrowings (and a pledge of assets
therefor) for temporary or emergency purposes may be made from banks in an
amount up to 20% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of each Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of that Fund's total assets
at the time of the most recent loan. The entry into repurchase agreements is not
considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar as
a Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities, except that all
or substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and policies
of that Fund.
5. Invest more than 5% of the value of the gross assets of each Fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, except that all or substantially all of the assets of each
Fund may be invested in another registered investment company having the same
investment objective and policies of that Fund.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer, except
that all or substantially all of the assets of each Fund may be invested in
another registered investment company having the same investment objective and
policies of that Fund. To the extent permitted by exemptions granted under the
1940 Act, the Funds may invest in shares of one or more money market funds
managed by Franklin Advisers, Inc. or its affiliates.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer if, to the knowledge of the Trust, one or more
of its officers, trustees or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor, except that, to the extent this restriction is applicable, all
or substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and policies
of that Fund.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs.
11. Invest in companies for the purpose of exercising control or management,
except that, to the extent this restriction is applicable, all or substantially
all of the assets of each Fund may be invested in another registered investment
company having the same investment objective and policies of that Fund.
12. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; except that all or
substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and policies
as that Fund or except to the extent the Funds invest their uninvested daily
cash balances in shares of the Franklin Money Fund and other money market funds
in the Franklin Funds provided i) the purchases and redemptions of such money
fund shares may not be subject to any purchase or redemption fees, ii) the
investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the fund's shares (as determined
under Rule 12b-1 under federal securities laws), and iii) provided aggregate
investments by a Fund in any such money fund do not exceed (A) the greater of
(i) 5% of the Fund's total net assets or (ii) $2.5 million, or (B) more than 3%
of the outstanding shares of any such money fund.
13. Issue senior securities, as defined in the 1940 Act, except that this
restriction will not prevent the Funds from entering into repurchase agreements
or making borrowings, mortgages and pledges as permitted by restriction #1
above.
The investment restrictions of both Portfolios are the same as the investment
restrictions of the Funds, except as indicated below and except as necessary to
reflect the policy of the Funds to invest all of their assets in the shares of
the Mortgage Portfolio or Securities Portfolio, as applicable.
The Mortgage Portfolio may not:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in an amount up to 20% of total asset value. The Portfolio will
not purchase additional investment securities while borrowings in excess of 5%
of total assets are outstanding.
2. Buy any securities on "margin" or sell any securities "short," except for any
delayed delivery or when-issued securities as described in the Prospectus.
3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act. To the extent permitted by exemptions which may be
granted under the 1940 Act, the Portfolio may invest in shares of one or more
money market funds managed by Franklin Advisers, Inc. or its affiliates. (The
investment restriction of the Funds', in this respect, is stated in far more
detail.)
The Securities Portfolio may not:
1. Borrow money or mortgage or pledge any of its assets in an amount exceeding
331/3% of the value of the Portfolio's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount borrowed)
at the time the borrowing was made.
2. Buy any securities on "margin" or sell any securities "short," except for any
delayed delivery or when-issued securities as described in this registration
statement.
3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act or pursuant to an exemption therefrom, granted by the
SEC. To the extent permitted by exemptions which may be granted under the 1940
Act, the Portfolio may invest in shares of one or more money market funds
managed by Franklin Advisers, Inc. or its affiliates. (The investment
restriction of the Funds', in this respect, is stated in far more detail.)
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of each Fund's investment activities.
The Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Trust under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (82) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 31 of the investment companies in the
Franklin Templeton Group of Funds.
*Edward B. Jamieson (48) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of five of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 61 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of Funds.
Gordon S. Macklin (68) Director
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Source One Mortgage Services Corporation (financial services), Shoppers Express
(home shopping), Spacehab, Inc. (aerospace technology); and director, trustee or
managing general partner, as the case may be, of 61 of the investment companies
in the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist
Group; Director, H & Q Healthcare Investors; and President, National Association
of Securities Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 61 of the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief Financial
San Mateo, CA 94404 Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel - Legal, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc.
and officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Charles E. Johnson (40) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
The officers and Board members of the Trust are also officers and trustees of
the Portfolios, except as follows: Edward B. Jamieson, President and Trustee of
the Trust, is not an officer or trustee of the Portfolios. Charles E. Johnson,
Vice President of the Trust, is President and Trustee of the Portfolios. The
following trustee of the Portfolios is not an officer or trustee of the Trust.
William J. Lippman (72) President and
One Parker Plaza Trustee
Fort Lee, NJ 07024
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Management, Inc.; President
and Director Franklin Advisory Services, Inc. and officer and/or director or
trustee of seven of the investment companies in the Franklin Group of Funds.
Mr. Lippman is considered an "interested person" of the Portfolios under the
1940 Act. The Board, 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 that may arise from having substantially the
same persons serving on the boards of the Trust and the Portfolios. The Board
has determined that there are no conflicts of interest presented by this
arrangement at the present time. Please see "Summary of Procedures to Monitor
Conflicts of Interest" in this SAI.
The tables above show the officers and Board members and the trustees of the
Portfolios who are affiliated with Distributors and Advisers. Nonaffiliated
Board members are currently paid $925 per month plus $925 per meeting attended.
As shown above, some of the nonaffiliated Board members and trustees of the
Portfolios also serve as directors, trustees or managing general partners of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table provides
the total fees paid to nonaffiliated Board members and the trustees of the
Portfolios by the Trust, by the Portfolios and by other funds in the Franklin
Templeton Group of Funds.
Number of
Total Fees Boards in
Received from the Franklin
Total Fees Total Fees the Franklin Templeton Group
Received fromReceived fromTempleton Groupof Funds on Which
Name the Trust* the Portfolios*of Funds** Each Serves***
Frank H. Abbott, III $21,275 $1,150 $165,236 32
Harris J. Ashton 21,275 1,150 343,591 56
S. Joseph Fortunato 21,275 1,150 360,411 58
David Garbellano 21,275 1,150 148,916 31
Frank W.T. LaHaye 20,350 1,150 139,233 27
Gordon S. Macklin 21,275 1,150 335,541 53
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members and Trustees of the Portfolio are responsible. The Franklin Templeton
Group of Funds currently includes 62 registered investment companies, with
approximately 171 U.S. based funds or series.
Nonaffiliated members of the Board and trustees of the Portfolios are reimbursed
for expenses incurred in connection with attending board meetings, paid pro rata
by each fund in the Franklin Templeton Group of Funds for which they serve as
director, trustee or managing general partner. No officer or Board member or
trustee of the Portfolios received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members and
trustees of the Portfolio who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and trustees, as a group, owned of record
and beneficially approximately 209 shares of the Adjustable U.S. Government Fund
and 198 shares of the Adjustable Rate Securities Fund, or less than 1% of the
total outstanding shares of each Fund. Many of the Board members also own shares
in other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of
Charles E. Johnson.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
Investment Manager and Administrator and Services Provided. Advisers is the
investment manager of the Portfolio and is also the administrator of the Fund.
Advisers provides investment research and portfolio management services,
including the selection of securities for the Portfolio to buy, hold or sell and
the selection of brokers through whom the Portfolio's portfolio transactions are
executed. Advisers' activities are subject to the review and supervision of the
Board of Trustees of the Portfolio to whom Advisers renders periodic reports of
the Portfolio's investment activities. Advisers is covered by fidelity insurance
on its officers, directors and employees for the protection of the Fund and the
Portfolio.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Portfolio. Similarly, with
respect to the Portfolio, Advisers is not obligated to recommend, buy or sell,
or to refrain from recommending, buying or selling any security that Advisers
and access persons, as defined by the 1940 Act, may buy or sell for its or their
own account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Portfolio or other funds that
it manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Portfolio's Code of Ethics.
Please see "Miscellaneous Information - Summary of Code of Ethics."
Management and Administration Fees. Under its management agreement, the
Portfolio pays Advisers a management fee equal to an annual rate of 40/100 of 1%
of the Fund's average daily net assets up to $5 billion, 35/100 of 1% of average
daily net assets over $5 billion up to $10 billion, 33/100 of 1% of average
daily net assets over $10 billion up to $15 billion, and 30/100 of 1% of average
daily net assets over $15 billion. The fee is computed at the close of business
on the last business day of each month.
Advisers provides various administrative, statistical, and other services to the
Fund. Under its administration agreement, the Fund pays Advisers an
administration fee equal to an annual rate of 10/100 of 1% of the Fund's average
daily net assets up to and including $5 billion; 9/100 of 1% of the Fund's
average daily net assets in excess of $5 billion up to and including $10
billion; and 8/100 of 1% of the Fund's average daily net assets in excess of $10
billion. The fee is computed at the close of business on the last business day
of each month.
For the fiscal years ended October 31, 1994, 1995 and 1996, management fees,
before any advance waiver, totaled $4,787,133, $2,456,413 and $1,891,159,
respectively, for the Mortgage Portfolio and $372,319, $119,324 and $89,969,
respectively, for the Securities Portfolio. Under an agreement by Advisers to
limit its fees so that the total operating expenses of the Fund and the
Portfolio are not higher than if the Fund were to invest directly in the
securities held by the Portfolio, the Portfolio paid management fees totaling
$0, $968,077 and $1,090,876, respectively, for the Mortgage Portfolio and,
$205,735, $55,384 and $41,378, respectively, for the Securities Portfolio during
the same periods.
For the fiscal years ended October 31, 1994, 1995, and 1996, the Fund paid
administration fees totaling $1,077,633, $584,957 and $462,426, respectively,
for the Adjustable U.S. Government Fund. Administration fees, before any advance
waiver, were $37,387, $19,936 and $15,384, respectively, for the Adjustable Rate
Securities Fund during the same periods. The Adjustable Rate Securities Fund did
not pay any administration fees for the fiscal year ended October 31, 1994, and
paid $14,087 and $15,384 for the fiscal years ended October 31, 1995 and 1996,
respectively.
Management Agreement. The management agreement for the Portfolio is in effect
until February 28, 1998. It may continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board of Trustees of the Portfolio or by a vote of the holders of a majority of
the Portfolio's outstanding voting securities, and in either event by a majority
vote of the Board of Trustees of the Portfolio who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board of Trustees of the Portfolio), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board of Trustees of the Portfolio or by a vote of
the holders of a majority of the Portfolio's outstanding voting securities, or
by Advisers on 60 days' written notice, and will automatically terminate in the
event of its assignment, as defined in the 1940 Act.
Shareholder Servicing Agent. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended October
31, 1996, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31 , 1996.
HOW DOES THE PORTFOLIO BUY SECURITIES?
The Fund will not incur any brokerage or other costs in connection with its
purchase or redemption of shares of the Portfolio.
Since most purchases by the Portfolio are principal transactions at net prices,
the Portfolio incurs little or no brokerage costs. The Portfolio deals directly
with the selling or buying principal or market maker without incurring charges
for the services of a broker on its behalf, unless it is determined that a
better price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The Portfolio seeks to
obtain prompt execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical information,
as well as for special services provided by the dealers in the execution of
orders.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Portfolio tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the
Portfolio, any portfolio securities tendered by the Portfolio will be tendered
through Distributors if it is legally permissible to do so. In turn, the next
management fee payable to Advisers will be reduced by the amount of any fees
received by Distributors in cash, less any costs and expenses incurred in
connection with the tender.
If purchases or sales of securities of the Portfolio and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by Advisers, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Portfolio is concerned. In other cases it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Portfolio.
During the fiscal years ended October 31, 1994, 1995 and 1996, the Mortgage and
Securities Portfolios paid no brokerage commissions.
As of October 31, 1996, neither the Adjustable U.S. Government or Adjustable
Rate Securities Funds nor the Mortgage or Securities Portfolios owned securities
of their regular broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares may be offered with
the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
Under $30,000.................... 3%
$30,000 but less than $100,000... 2%
$100,000 but less than $400,000.. 1%
$400,000 or more................. 0%
Other Payments to Securities Dealers. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 0.75% on sales of $1
million to $2 million, plus 0.60% on sales over $2 million to $3 million, plus
0.50% on sales over $3 million to $50 million, plus 0.25% on sales over $50
million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases by certain retirement plans pursuant to a sales charge waiver, as
discussed in the Prospectus: 1% on sales of $500,000 to $2 million, plus 0.80%
on sales over $2 million to $3 million, plus 0.50% on sales over $3 million to
$50 million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million. Distributors may make these payments in the form of
contingent advance payments, which may be recovered from the Securities Dealer
or set off against other payments due to the dealer if shares are sold within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Letter of Intent. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the Securities Dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Reinvestment Date. Shares of the Adjustable U.S. Government Fund acquired
through the reinvestment of dividends will be purchased at the Net Asset Value
determined on the business day following the dividend record date (sometimes
known as the "ex-dividend date"). The processing date for the reinvestment of
dividends may vary and does not affect the amount or value of the shares
acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account in the Adjustable
U.S. Government Fund, declared but unpaid income dividends and capital gain
distributions will be exchanged into the new fund and will be invested at Net
Asset Value. If you request the exchange of the total value of your account in
the Adjustable Rate Securities Fund, accrued but unpaid income dividends and
capital gain distributions will be reinvested in the Fund at the Net Asset Value
or the date of the exchange, and then the entire share balance will be exchanged
into the new Fund. Backup withholding and information reporting may apply.
Information regarding the possible tax consequences of an exchange is included
in the tax section in this SAI and in the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell 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 occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Portfolio, 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of the Portfolio's and thus the Fund's shares is determined
as of such times. Occasionally, events affecting the values of these securities
may occur between the times at which they are determined and the scheduled close
of the NYSE that will not be reflected in the computation of the Portfolio's and
Fund's Net Asset Value. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their fair
value as determined in good faith by the Board of Trustees of the Portfolio.
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 of the Portfolio. With
the approval of the Board of Trustees of the Portfolio, the Portfolio may
utilize a pricing service, bank or Securities Dealer to perform any of the above
described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of 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 may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the prior fiscal year. The Fund may make more than one distribution derived
from net short-term and net long-term capital gains in any year or adjust the
timing of these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to a Fund) to you by December 31 of each year in order to avoid the
imposition of a federal excise tax. Each Fund intends as a matter of policy to
declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or all federal excise
taxes. Under the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by a
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount realized from the transaction, subject to the rules described
below. If such shares are a capital asset in the hands of the shareholder, gain
or loss will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of a Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
All or a portion of the sales charge incurred in purchasing shares of a Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Funds 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.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding taxes to distributions received by you from a Fund and the
application of foreign tax laws to these distributions.
Gain realized by a Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of a Fund's expected return is attributable to the time value
of the Fund's net investment in such transaction and any one of the following
criteria are met: 1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical property
in the future; 2) the transaction is an applicable straddle; 3) the transaction
was marketed or sold to the Fund on the basis that it would have the economic
characteristics of a loan but would be taxed as capital gain; or 4) the
transaction is specified in Treasury regulations to be promulgated in the
future. The applicable imputed income amount, which represents the deemed return
on the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, and is
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for shares of the Fund. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of each Fund's shares, aggregate underwriting
commissions for the fiscal years ended October 31, 1994, 1995 and 1996 were
$306,789, $121,256 and $151,651, respectively, for the Adjustable U.S.
Government Fund and $78,020, $12,586 and $24,584, respectively, for the
Adjustable Rate Securities Fund. After allowances to dealers, Distributors
retained $38,831, $12,155 and $19,401, respectively, for the Adjustable U.S.
Government Fund and $10,090, $1,366 and $3,268, respectively, for the Adjustable
Rate Securities Fund in net underwriting discounts and commissions and received
$35 in connection with redemptions or repurchases of shares of the Adjustable
U.S. Government Fund for the fiscal year ended October 31, 1996. Distributors
may be entitled to reimbursement under each Fund's Rule 12b-1 plan, as discussed
below. Except as noted, Distributors received no other compensation from the
Funds for acting as underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum of 0.25%
per year of its average daily net assets, payable quarterly, for expenses
incurred in the promotion and distribution of its shares.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be for the financing of any activity primarily
intended to result in the sale of shares of the Fund within the context of Rule
12b-1 under the 1940 Act, then such payments shall be deemed to have been made
pursuant to the plan.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made pursuant
to the plan, exceed the amount permitted to be paid under the rules of the NASD.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The plan does not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
later years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plan as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plan for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1. The
plan is renewable annually by a vote of the Board, including a majority vote of
the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plan and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers, or the underwriting agreement with
Distributors, or by vote of a majority of the Fund's outstanding shares.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the plan or any
related agreements shall be approved by a vote of the non-interested members of
the Board, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plan should be continued.
For the fiscal year ended October 31, 1996, Distributors had eligible
expenditures of $1,147,599 and $42,072 for the Adjustable U.S. Government Fund
and the Adjustable Rate Securities Fund, respectively, for advertising,
printing, and payments to underwriters and broker-dealers pursuant to each
Fund's plan, of which the Fund paid Distributors $1,069,262 and 34,866,
respectively.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions are reinvested at
Net Asset Value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
The average annual total return for the one-, five-year, and since inception
periods ended October 31, 1996, were 4.20%, 3.21% and 5.57%, respectively, for
the Adjustable U.S. Government Fund. The average annual total return for the
one-year and since inception periods ended October 31, 1996, were 3.80% and
4.66%, respectively, for the Adjustable Rate Securities Fund. The Adjustable
U.S. Government Fund and Adjustable Rate Securities Fund commenced operations on
October 20, 1987, and December 26, 1991, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods or fractional portion thereof
Cumulative Total Return. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the Fund's actual return for a specified period rather than on its average
return over one-, five- and ten-year periods. or fractional portion thereof.
The Adjustable U.S. Government Fund's cumulative total return for the one-,
five-year and since inception periods ended October 31, 1996, were 4.20%, 17.09%
and 63.20%, respectively. The Adjustable Rate Securities Fund's cumulative total
return for the one-year and since inception periods ended October 31, 1996, were
3.80% and 24.72%, respectively.
YIELD
Current Yield. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the maximum Offering Price per share on the last day of
the period and annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The yield for each
Fund for the 30-day period ended October 31, 1996, was 5.53% for the Adjustable
U.S. Government Fund and 5.53% for the Adjustable Rate Securities Fund.
This figure was obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
cd
where:
a =interest earned during the period
b =expenses accrued for the period (net of reimbursements)
c =the average daily number of shares outstanding during the period that were
entitled to receive dividends
d =the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of
the Fund. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share during a certain period and dividing
that amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as
short-term capital gains and is calculated over a different period of time. The
current distribution rate for the 30-day period ended October 31, 1996, was
5.51% for the Adjustable U.S. Government Fund and 5.58% for the Adjustable Rate
Securities Fund.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis- measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
d) CDA Mutual Fund Report, published by CDA
Investment Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded growth rate) over
specified time periods for the mutual fund industry.
e) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
f) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines - provide
performance statistics over specified time periods.
g) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
h) Stocks, Bonds, Bills and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, notes and bonds, and
inflation.
i) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
j) Salomon Brothers Broad Bond Index or its component indices - the Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
k) Salomon Brothers Composite Index or its component indices - the High Yield
Index measures yields, price and total return for Long-Term High-Yield Index,
Intermediate-Term High-Yield Index and Long-Term Utility High-Yield Index.
l) Lehman Brothers Aggregate Bond Index or its component indices - the Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
m) Standard & Poor's Bond Indices - measure yield and price of Corporate,
Municipal, and Government Bonds.
n) Other taxable investments, including certificates of deposit accounts
(MMDAs), checking accounts, savings accounts, money market mutual funds, and
repurchase accounts.
o) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
p) Internal Business Communications Money Fund Report - industry averages for
seven-day annualized and compounded yields of taxable, tax-free and government
money funds.
q) Merrill Lynch Corporate Master Index - reflects Investment Grade (BB/Baa or
better) corporate debt. It represents a cross-section of industries with
maturities ranging from 1 to 15 years.
r) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
The Adjustable U.S. Government Fund was the first investment company in the U.S.
to invest primarily in mortgage-backed securities based upon adjustable rate
mortgage obligations.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.6 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
As of February 3, 1997, the principal shareholder of the Adjustable Rate
Securities Fund, beneficial or of record, was as follows:
Share
Name and Address Amount Percentage
The Steamfitters 197,758.922 12.69%
Vacation Plan
5 Penn Plaza, 19th Floor
New York, NY 10001-1810
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Adjustable U.S. Government Fund, no other person holds
beneficially or of record more than 5% of that Fund's outstanding shares.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Portfolio's investment manager and the
Fund's administrator
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer two
classes of shares, designated "Class I" and "Class II." The two classes have
proportionate interests in the same portfolio of investment securities. They
differ, however, primarily in their sales charge structures and Rule 12b-1
plans. Because the Fund's sales charge structure and Rule 12b-1 plan are similar
to those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 2.25% sales charge.
PROSPECTUS - The prospectus for the Fund dated March 1, 1997, as may be amended
from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDICES
SUMMARY OF PROCEDURES TO
MONITOR CONFLICTS OF INTEREST
The Board of Trustees of Adjustable Rate Securities Portfolios, on behalf of its
series ("master funds"), and the Board of the Trust ("feeder fund"), (both of
which, except in the case of three trustees, are composed of the same
individuals) recognize that there is the potential for certain conflicts of
interest to arise between the master fund and the feeder fund in this format.
These potential conflicts of interest could include, among others: the creation
of additional feeder funds with different fee structures; the creation of
additional feeder funds that could have controlling voting interests in any
pass-through voting which could affect investment and other policies; a proposal
to increase fees at the master fund level; and any consideration of changes in
fundamental policies at the master fund level that may or may not be acceptable
to a particular feeder fund.
In recognition of the potential for conflicts of interest to develop, the Board
of Trustees of Adjustable Rate Securities Portfolios and the Board of the Trust
have adopted certain procedures under which i) management of the master fund and
the feeder fund will, on a yearly basis, report to each board, including the
independent members of each board, on the operation of the master/feeder fund
structure; ii) the independent members of each board will have ongoing
responsibility for reviewing all proposals at the master fund level to determine
whether any proposal presents a potential for a conflict of interest and to the
extent any other potential conflicts arise before the normal annual review, they
will act promptly to review the potential conflict; iii) if the independent
members of each board determine that a situation or proposal presents a
potential conflict, they will request a written analysis from the master fund
management describing whether the apparent potential conflict of interest will
impede the operation of the constituent feeder fund and the interests of the
feeder fund's shareholders; and iv) upon receipt of the analysis, the
independent members of each board shall review the analysis and present their
conclusion to the full boards.
If no actual conflict is deemed to exist, the independent board members will
recommend that no further action be taken. If the analysis is inconclusive, they
may submit the matter to and be guided by the opinion of independent legal
counsel issued in a written opinion. If a conflict is deemed to exist, they may
recommend one or more of the following actions: i) suggest a course of action
designed to eliminate the potential conflict of interest; ii) if appropriate,
request that the full boards submit the potential conflict to shareholders for
resolution; iii) recommend to the full boards that the affected feeder fund no
longer invest in its designated master fund and propose either a search for a
new master fund in which to invest the feeder fund's assets or the hiring of an
investment manager to manage the feeder fund's assets in accordance with its
objectives and policies; iv) recommend to the full boards that a new board be
recommended to shareholders for approval; or v) recommend such other action as
may be considered appropriate.
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - ADVISOR CLASS
Franklin Investors Securities Trust
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Table of Contents
How does the Fund Invest its Assets? ....... 2
What are the Fund's Potential Risks? ....... 7
Investment Restrictions .................... 8
Officers and Trustees ...................... 10
Investment Management and
Other Services ............................ 13
How does the Fund Buy
Securities for its Portfolio? ............. 15
How Do I Buy, Sell and
Exchange Shares? .......................... 15
How are Fund Shares Valued? ................ 17
Additional Information on
Distributions and Taxes ................... 18
The Fund's Underwriter ..................... 21
How does the Fund
Measure Performance? ...................... 22
Miscellaneous Information .................. 24
Financial Statements ....................... 25
Useful Terms and Definitions ............... 25
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The Franklin Global Government Income Fund (the "Fund"), is a non-diversified
series of Franklin Investors Securities Trust (the "Trust"), an open-end
management investment company. The Fund's investment objective is to provide
high current income, consistent with preservation of capital; capital
appreciation is a secondary consideration. The Fund seeks to achieve its
objective by investing primarily in debt securities issued by domestic and
foreign governments.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated March
1, 1997, as may be amended from time to time, contains the basic information you
should know before investing in the Fund. For a free copy, call 1-800/DIAL BEN
or write the Fund at the address shown.
This SAI is not a prospectus. It contains information in addition to and in more
detail than set forth in the Prospectus. This SAI is intended to provide you
with additional information regarding the activities and operations of the Fund,
and should be read in conjunction with the Prospectus.
Mutual funds, annuities, and other investment products:
o are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other agency of the U.S. government;
o are not deposits or obligations of, or guaranteed or endorsed by, any bank;
o are subject to investment risks, including the possible loss of principal.
How does the Fund Invest its Assets?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
The underlying assets of the Fund may be retained in cash, including cash
equivalents that are Treasury bills, commercial paper and short-term bank
obligations such as CD's, bankers' acceptances and repurchase agreements. It is
intended, however, that only so much of the underlying assets of the Fund be
retained in cash as is deemed desirable or expedient under then-existing market
conditions.
Restricted Securities. The Fund may invest in securities that cannot be offered
to the public for sale without first being registered under the Securities Act
of 1933 ("restricted securities"), or in other securities which, in the opinion
of the Board, may be otherwise illiquid. It is the policy of the Fund, however,
that illiquid securities may not constitute, at the time of purchase, more than
10% of the value of the net assets of the Fund. Generally, an "illiquid"
security is any security that cannot be disposed of promptly and in the ordinary
course of business at approximately the amount at which the Fund has valued the
security. Notwithstanding this limitation, the Board has authorized the Fund to
invest in restricted securities where such investment is consistent with the
Fund's investment objective and has authorized such securities to be considered
liquid to the extent the investment manager determines that there is a liquid
institutional or other market for such securities. For example, restricted
securities that may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933, as amended, and for
which a liquid institutional market has developed, will be considered liquid
even though such securities have not been registered pursuant to the Securities
Act of 1933.
The Board will review any determination by Advisers to treat a restricted
security as a liquid security on an ongoing basis, including Advisers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, Advisers and the Board will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
U.S. Government Securities. As indicated in the Prospectus, the Fund may invest
in U.S. government securities, which include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. U.S. government securities do not generally involve the
credit risks associated with other types of interest bearing securities, and, as
a result, the yields available from such securities are generally lower than the
yields available from other types of interest bearing securities. Like all
interest bearing securities, however, the market values of U.S. government
securities change as interest rates fluctuate.
There are no restrictions or limitations on investments in obligations of the
U.S., or of corporations chartered by the U.S. Congress as federal government
instrumentalities.
Obligations of Developing Countries. Among the foreign securities in which the
Fund may invest will be the fixed-income obligations of governments, government
agencies and corporations of developing countries. As of the date of this SAI,
such opportunities are limited as many developing countries are rescheduling
their existing loans and obligations. However, as restructuring is completed and
economic conditions improve, these obligations may become available at discounts
and offer the Fund the potential for current U.S. dollar income. These
instruments are not traded on any exchange. However, Advisers believes there may
be a market for such securities either in multinational companies wishing to
purchase such assets at a discount for further investment, or from the issuing
governments which may decide to redeem their obligations at a discount.
Interest Rate Swaps. The Fund may participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest rate
obligations, one of which has an interest rate fixed to maturity while the other
has an interest rate that changes in accordance with changes in a designated
benchmark (i.e., London Interbank Offered Rate (LIBOR), prime, commercial paper,
or other benchmarks). The obligations to make repayment of principal on the
underlying securities are not exchanged. These transactions generally require
the participation of an intermediary, frequently a bank. The entity holding the
fixed rate obligation will transfer the obligation to the intermediary, and such
entity will then be obligated to pay to the intermediary a floating rate of
interest, generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity that
has a floating-rate obligation that substantially mirrors the obligation desired
by the first party. In return for assuming a fixed obligation, the second entity
will pay the intermediary all sums that the intermediary pays on behalf of the
first entity, plus an arrangement fee and other agreed upon fees.
Interest rate swaps are generally entered into to permit the party seeking a
floating rate obligation the opportunity to acquire the obligation at a lower
rate than is directly available in the credit market, while permitting the party
desiring a fixed rate obligation the opportunity to acquire a fixed rate
obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed rate obligations at a low enough coupon rate to cover the
cost involved.
Other Fixed-Income Securities. As stated in the Prospectus, the Fund may
purchase fixed-income securities of both domestic and foreign issuers including,
among others, preference stock and all types of long-term or short-term debt
obligations, such as equipment trust certificates, equipment lease certificates,
and conditional sales contracts. Equipment related instruments are used to
finance the acquisition of new equipment. The instrument gives the bond-holder
the first right to the equipment in the event that interest and principal are
not paid when due. Title to the equipment is held in the name of the trustee,
usually a bank, until the instrument is paid off. Equipment related instruments
usually mature over a period of 10 to 15 years. In practical effect equipment
trust certificates, equipment lease certificates and conditional sale contracts
are substantially identical; they differ mainly in legal structure. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
Options On U.S. and Foreign Securities. In an effort to increase current income
and to reduce the fluctuations in Net Asset Value, the Fund intends to write
covered put and call options and buy put and call options on U.S. or foreign
securities that are traded on U.S. and foreign securities exchanges and
over-the-counter markets.
As described in the Prospectus, the Fund may enter into closing transactions to
terminate an options position. The Fund will realize a profit from a closing
transaction if the price of the transaction is less than the premium received
from writing the option or is more than the premium paid to purchase the option;
the Fund will realize a loss from a closing transaction if the price of the
transaction is more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases in the market
price of a call option written by the Fund will generally be inversely related
to the market price of the underlying security, any loss resulting from the
closing out of a call option is likely to be offset in whole or in part by
appreciation in the value of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call will depend upon the expected price
movement of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money")
the current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price for the security and the exercise price. If the options
are not exercised and the price of the underlying security declines, the amount
of such decline will be mitigated by the premium received.
Futures Contracts. The Fund may enter into contracts for the purchase or sale
for future delivery of debt securities or currency ("Futures Contracts"). A
"sale" of a Futures Contract means the acquisition and assumption of a
contractual obligation to deliver the securities or currency called for by the
contract at a specified price on a specified date. A "purchase" of a Futures
Contract means the acquisition of a contractual right and obligation to acquire
the securities or currency called for by the contract at a specified price on a
specified date. U.S. Futures Contracts have been designed by exchanges which
have been designated "contract markets" by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract market. Existing
contract markets for Futures Contracts on debt securities include the Chicago
Board of Trade, the New York Cotton Exchange, the MidAmerica Commodity Exchange
(the "MCE") and the International Money Market of the Chicago Mercantile
Exchange (the "IMM"). Futures Contracts trade on these exchanges, and, through
their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. The Fund will enter
into Futures Contracts that are based on foreign currencies or on debt
securities that are backed by the full faith and credit of the U.S. government,
such as long-term U.S. Treasury bonds, Treasury notes, Government National
Mortgage Association modified pass-through mortgage-backed securities, and
three-month U.S. Treasury bills. The Fund may also enter into Futures Contracts
that are based on corporate securities and non-U.S. government debt securities
when such securities become available.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a Futures
Contract may not have been issued when the contract was written.
Although Futures Contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is terminated before the settlement date of the contract without having to make
or take delivery of the securities or currency. The termination of a contractual
obligation is accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical offsetting Futures Contract calling for
delivery in the same month. Such a transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
underlying security or currency. Since all transactions in the futures market
are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, the Fund will incur brokerage fees
when it purchases or sells Futures Contracts.
To the extent the Fund enters into a Futures Contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the Futures Contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The Futures Contract will be marked-to-market daily. Should
the value of the Futures Contract decline relative to the Fund's position, the
Fund will be required to pay to the futures commission merchant an amount equal
to such change in value. The Fund may also cover its futures position by holding
a call option on the same Futures Contract permitting the Fund to purchase the
instrument or currency at a price no higher than the price established in the
Futures Contract which it sold.
The purpose of the purchase or sale of a Futures Contract by the Fund is to
attempt to protect the Fund from fluctuations in interest or currency exchange
rates without actually buying or selling long-term, fixed-income securities or
currency. For example, if the Fund owns long-term bonds, and interest rates were
expected to increase, the Fund might enter into Futures Contracts for the sale
of debt securities. Such a sale would have much the same effect as selling an
equivalent value of the long-term bonds owned by the Fund. If interest rates did
increase, the value of the debt securities owned by the Fund would decline, but
the value of the Futures Contracts to the Fund would increase at approximately
the same rate, thereby keeping the Net Asset Value of the Fund from declining as
much as it otherwise would have. The Fund could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is often more liquid than the cash (securities) market, the use of Futures
Contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities. Similarly, if the Fund
expects that a foreign currency in which its securities are denominated will
decline in value against the U.S. dollar, the Fund may sell Futures Contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an increase
in the value of the Fund's futures position.
Alternatively, when it is expected that interest rates may decline, Futures
Contracts may be purchased in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of Futures Contracts should be similar to that of long-term bonds, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the Futures Contracts could be liquidated and the Fund could then buy
long-term bonds on the cash (securities) market. Similarly, if the Fund intends
to acquire a security or other asset denominated in a currency that is expected
to appreciate against the U.S. dollar, the Fund may purchase Futures Contracts
on that currency. If the value of the foreign currency does appreciate, the
increase in the value of the futures position will offset the increased U.S.
dollar cost of acquiring the asset denominated in that currency.
The ordinary spreads between prices in the cash (securities) or foreign currency
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets are
subject to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close Futures
Contracts through offsetting transactions which could distort the normal
relationship between the cash (securities) or foreign currency and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by Advisers may still not result in a successful hedging transaction.
Options on Futures Contracts. The Fund intends to purchase and write options on
Futures Contracts for hedging purposes only. The purchase of a call option on a
Futures Contract is similar in some respects to the purchase of a call option on
an individual security or currency. Depending on the pricing of the option
compared to either the price of the Futures Contract upon which it is based or
the price of the underlying debt securities or currency, it may or may not be
less risky than direct ownership of the Futures Contract of the underlying debt
securities or currency. As with the purchase of Futures Contracts, when the Fund
is not fully invested it may purchase a call option on a Futures Contract to
hedge against a market advance due to declining interest rates or appreciation
in the value of a foreign currency against the U.S. dollar.
If the Fund writes a call option on a Futures Contract and the futures price at
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium which may provide a partial hedge against any
decline that may have occurred in the value of the Fund's portfolio holdings. If
the futures price at expiration of the option is higher than the exercise price,
the Fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its portfolio securities.
The Fund's ability to engage in the options on futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options on futures are relatively new and still developing, and it is
impossible to predict the amount of trading interest that may exist in various
types of options on futures. Therefore, no assurance can be given that the Fund
will be able to utilize these instruments effectively for the purposes set forth
above. Furthermore, the Fund's ability to engage in options on futures
transactions may be limited by tax considerations.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Futures Contracts on foreign currencies, or Forward Contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of the
securities, the Fund may purchase call options on such currency. The purchase of
options could offset, at least partially, the effects of the adverse movements
in currency exchange rates. As with other types of options, however, the benefit
the Fund derives from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options that would require the Fund to forego a portion or all of the benefits
of advantageous changes in such rates.
The Fund may also write options on foreign currencies for hedging purposes. For
example, where the Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to adverse fluctuations in currency exchange
rates the Fund could, instead of purchasing a put option, write a call option on
the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency. If currency exchange rates increase as
projected, the put option will expire unexercised and the premium received will
offset the increased cost. As with other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium received, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss, which
may not be fully offset by the amount of the premium received. As a result of
writing options on foreign currencies, the Fund may also be required to forego
all or a portion of the benefits that might otherwise have been obtained from
favorable changes in currency exchange rates.
All call options written on foreign currencies will be covered. A call option on
foreign currencies written by the Fund is "covered" if the Fund owns (or has an
absolute right to acquire) the underlying foreign currency covered by the call.
A call option is also covered if the Fund has a call on the same foreign
currency in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash and U.S. government securities
in a segregated account with its custodian.
The Fund proposes to take advantage of investment opportunities in the area of
options, Futures Contracts and options on Futures Contracts that are not
presently contemplated for use by the Fund or that are not currently available
but which may be developed in the future, to the extent such opportunities are
both consistent with the Fund's investment objective and policies and are
legally permissible transactions for the Fund. These opportunities, if they
arise, may involve risks that are different from those involved in the options
and futures activities described above.
Loan Participations. The Fund may invest in loan participations, which may have
speculative characteristics. The Fund may purchase loan participations at par or
which sell at a discount because of the borrower's credit problems. To the
extent the borrower's credit problems are resolved, the loan participation may
appreciate in value but not beyond par value.
The Manager may acquire loan participations that sell at a discount, from time
to time, when it believes the investments offer the possibility of long-term
appreciation in value in addition to current income. An investment in loan
participations carries a high degree of risk and may have the consequence that
interest payments with respect to such securities may be reduced, deferred,
suspended or eliminated and may have the further consequence that principal
payments may likewise be reduced, deferred, suspended or cancelled, causing the
loss of the entire amount of the investment. Loans will generally be acquired by
the Fund from a bank, finance company or other similar financial services entity
("Lender").
Loan participations are interests in floating or variable rate senior loans
("Loans") to U.S. corporations, partnerships and other entities ("Borrowers"),
which operate in a variety of industries and geographical regions. The Fund will
purchase participation interests in Loans that may pay interest at rates which
are periodically redetermined on the basis of a base lending rate plus a
premium. These base lending rates are generally the Prime Rate offered by a
major U.S. bank, the London Inter-Bank Offered Rate, the CD rate or other base
lending rates used by commercial lenders. The Loans typically have the most
senior position in a Borrower's capital structure, although some Loans may hold
an equal ranking with other senior securities of the Borrower. Although the
Loans generally are secured by specific collateral, the Fund may invest in Loans
that are not secured by any collateral. Uncollateralized Loans pose a greater
risk of nonpayment of interest or loss of principal than do collateralized
Loans. The collateral underlying a collateralized Loan may consist of assets
that may not be readily liquidated, and there is no assurance that the
liquidation of such assets would fully satisfy a Borrower's obligation under a
Loan. The Fund is not subject to any restrictions with respect to the maturity
of the Loans in which it purchases participation interests.
Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although Advisers may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative factor
in Advisers' analysis.
Loans are not readily marketable and may be subject to restrictions on resale.
Participation interests in Loans generally are not listed on any national
securities exchange or automated quotation system and no regular market has
developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Fund expects to purchase interests
are of a relatively large principal amount and are held by a relatively large
number of owners which, in Advisers' opinion, should enhance the relative
liquidity of such interests.
When acquiring a loan participation, the Fund will have a contractual
relationship only with the Lender (typically an entity in the banking, finance
or financial services industries), not with the Borrower. The Fund has the right
to receive payments of principal and interest to which it is entitled only from
the Lender selling the loan participation and only upon receipt by the Lender of
payments from the Borrower. In connection with purchasing loan participations,
the Fund generally will have no right to enforce compliance by the Borrower with
the terms of the Loan Agreement, nor any rights with respect to any funds
acquired by other Lenders through set-off against the Borrower and the Fund may
not directly benefit from the collateral supporting the Loan in which it has
purchased the loan participation. As a result, the Fund may assume the credit
risk of both the Borrower and the Lender selling the loan participation. In the
event of the insolvency of the Lender selling a loan participation, the Fund may
be treated as a general creditor of the Lender, and may not benefit from any
set-off between the Lender and the Borrower.
What are the Fund's Potential Risks?
Options On U.S. and Foreign Securities. The writing of covered put options is
similar in terms of risk/return characteristics to buy-and-write transactions.
If the market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the Fund's gain will be
limited to the premium received. If the market price of the underlying security
declines or otherwise is below the exercise price, the Fund may elect to close
the position or wait for the option to be exercised and take delivery of the
security at the exercise price. The Fund's return will be the premium received
from the put option minus the amount by which the market price of the security
is below the exercise price. Out-of-the-money, at-the-money, and in-the-money
put options may be used by the Fund in the same market environments that call
options are used in equivalent buy-and-write transactions.
In addition to the matters discussed in the Prospectus, you should be aware that
when trading options on foreign exchanges or in the over-the-counter market many
of the protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the Fund as an option writer could lose amounts substantially in
excess of its initial investment, due to the margin and collateral requirements
associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation ("OCC"), thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in
the over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
In regard to the Fund's option trading activities, it intends to comply with the
California Corporate Securities Rules as they pertain to prohibited investments.
The Fund's option trading activities may result in the loss of principal under
certain market conditions.
Futures Contracts. Futures Contracts entail certain risks. Although the Fund
believes that the use of Futures Contracts will benefit the Fund, if Advisers'
investment judgment about the general direction of interest or currency exchange
rates is incorrect, the Fund's overall performance would be poorer than if it
had not entered into any such contract. For example, if the Fund has hedged
against the possibility of an increase in interest rates that would adversely
affect the price of bonds held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
the bonds which it has hedged because it will have offsetting losses in its
futures positions. Similarly, if the Fund sells a foreign currency Futures
Contract and the U.S. dollar value of the currency unexpectedly increases, the
Fund will lose the beneficial effect of the increase on the value of the
security denominated in that currency. In addition, in such situations, if the
Fund has insufficient cash, it may have to sell bonds from its portfolio to meet
daily variation margin requirements. Sales of bonds may be, but are not
necessarily, at increased prices which reflect the rising market. The Fund may
have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The amount of risk the Fund assumes when it
purchases an option on a Futures Contract is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the value
of the underlying Futures Contract will not be fully reflected in the value of
the option purchased. The Fund will purchase a put option on a Futures Contract
only to hedge the Fund's portfolio against the risk of rising interest rates or
the decline in the value of securities denominated in a foreign currency.
Additional Risks of Forward Contracts, Options on Foreign Currencies and Options
on Futures Contracts. Forward Contracts are not traded on contract markets
regulated by the CFTC or by the SEC. The ability of the Fund to use forward
contracts could be restricted to the extent that Congress authorized the CFTC or
the SEC to regulate such transactions. Forward Contracts are traded through
financial institutions acting as market-makers.
The purchase and sale of exchange-traded foreign currency options is subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, margins of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events.
Futures Contracts on currencies, options on Futures Contracts and options on
foreign currencies may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions could also be adversely
affected by (i) other foreign political and economic factors, (ii) less
available data than in the U.S. on which to base trading decisions, (iii) delays
in the Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the U.S., (iv) the imposition of exercise and
settlement terms and procedures, and margin requirements different from those in
the U.S., and (v) lesser trading volume.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that it may borrow from banks, for temporary or emergency purposes, up to 30% of
its total assets and pledge up to 30% of its total assets in connection
therewith. (No new investments will be made by the Fund while any outstanding
borrowings exceed 5% of its total assets.)
2. Buy any securities on "margin," except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities and except that the Fund may make margin deposits in connection
with Futures Contracts and Options on Futures Contracts.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
portfolio securities of the Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 30% of the value of the Fund's total assets
(taken at market value) at the time of the most recent loan. Also, entry into
repurchase agreements is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 25% of its assets in the securities of issuers in any one
industry, other than foreign governments.
6. Purchase from or sell any portfolio securities to its officers and trustees,
or any firm of which any officer or trustee is a member, as principal, except
that the Fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; retain securities of any issuer, if to the knowledge of
the Fund, one or more of its officers, trustees or the investment manager own
beneficially more than one-half of 1% of the securities of such issuer and all
such persons together own beneficially more than 5% of such securities.
7. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
8. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
9. Invest in interests in oil, gas or other mineral exploration or development
programs.
10. Invest in companies for the purpose of exercising control or management.
11. Purchase securities of other investment
companies.
12. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures contracts, forward contracts or repurchase transactions.
13. Make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such securities
or securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to, the
securities sold short ("short sales against the box"), and unless not more than
10% of the Fund's net assets (taken at market value) is held as collateral for
such sales at any one time.
(Restriction Nos. 7, 11 and 12 are not fundamental policies of the Fund and may
be changed by the trustees without shareholder approval.)
Pursuant to an undertaking given to the Texas State Securities Board, the Fund
may not invest in real estate limited partnerships or in interests (other than
publicly traded equity securities) in oil, gas, or other mineral leases,
exploration or development so long as the Fund's shares are offered for sale in
the state of Texas.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Trust under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupations
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (75) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott
Corporation (an investment company);
and director, trustee or managing
general partner, as the case may be, of
32 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and
Chairman of the Board, General Host
Corporation (nursery and craft
centers); Director, RBC Holdings, Inc.
(a bank holding company) and Bar-S
Foods (a meat packing company); and
director, trustee or managing general
partner, as the case may be, of 56 of
the investment companies in the
Franklin Templeton Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; Director of
General Host Corporation; director,
trustee or managing general partner, as
the case may be, of 58 of the
investment companies in the Franklin
Templeton Group of Funds.
David W. Garbellano (82) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant
Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture
capital company); and director, trustee
or managing general partner, as the
case may be, of 31 of the investment
companies in the Franklin Templeton
Group of Funds.
*Edward B. Jamieson (48) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Senior Vice President and Portfolio
Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of
five of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman of the
777 Mariners Island Blvd. Board and
San Mateo, CA 94404 Trustee
President and Director, Franklin
Resources, Inc.; Chairman of the Board
and Director, Franklin Advisers, Inc.
and Franklin Templeton Distributors,
Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host
Corporation; and officer and/or
director, trustee or managing general
partner, as the case may be, of most of
the other subsidiaries of Franklin
Resources, Inc. and of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director,
Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President
and Director, Franklin Advisers, Inc.;
Senior Vice President and Director,
Franklin Advisory Services, Inc., and
Franklin Investment Advisory Services,
Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer
and/or director, trustee or managing
general partner, as the case may be, of
most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of
the investment companies in the
Franklin Templeton Group of Funds.
Frank W.T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates
and Miller & LaHaye, which are General
Partners of Peregrine Ventures and
Peregrine Ventures II (venture capital
firms); Chairman of the Board and
Director, Quarterdeck Office Systems,
Inc. (software firm); Director,
FischerImaging Corporation (medical
imaging systems); and director or
trustee, as the case may be, of 27 of
the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation
(information and financial services);
Director, Fund American Enterprises
Holdings, Inc. (financial services),
MCI Communications Corporation, CCC
Information Services Group, Inc.
(information services), MedImmune, Inc.
(biotechnology), Source One Mortgage
Services Corporation (financial
services), Shoppers Express (home
shopping), Spacehab, Inc. (aerospace
services); and director, trustee or
managing general partner, as the case
may be, of 53 of the investment
companies in the Franklin Templeton
Group of Funds; formerly Chairman,
Hambrecht and Quist Group (venture
capital and investment banking);
Director, H & Q Healthcare Investors
(investment trust); and President,
National Association of Securities
Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and
Director, Franklin Resources, Inc.;
Executive Vice President and Director,
Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin
Advisers, Inc. and Franklin Templeton
Services, Inc.; Director,
Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the
case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer
and/or director or trustee of 61 of the
investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial
Officer and Treasurer, Franklin
Resources, Inc.; President, Franklin
Templeton Services, Inc.; Executive
Vice President, Templeton Worldwide,
Inc.; Senior Vice President and
Treasurer, Franklin Advisers, Inc. and
Franklin Templeton Distributors, Inc.;
Senior Vice President,
Franklin/Templeton Investor Services,
Inc.; Treasurer, Franklin Advisory
Services, Inc. and Franklin Investment
Advisory Services, Inc.; officer of
most other subsidiaries of Franklin
Resources, Inc.; and officer, director
and/or trustee of 61 of the investment
companies in the Franklin Templeton
Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General
Counsel, Franklin Resources, Inc.;
Senior Vice President, Franklin
Templeton Services, Inc., Franklin
Templeton Distributors, Inc.; Vice
President, Franklin Advisers, Inc.,
Franklin Advisory Services, Inc.,
Franklin Investment Advisory Services,
Inc., and officer of 61 of the
investment companies in the Franklin
Templeton Group of Funds.
Charles E. Johnson (40) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director,
Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton
Distributors, Inc.; President and
Director, Templeton Worldwide, Inc. and
Franklin Institutional Services
Corporation; officer and/or director,
as the case may be, of some of the
subsidiaries of Franklin Resources,
Inc. and officer and/or director or
trustee, as the case may be, of 39
the investment companies in the
Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.;
and officer of 38 of the investment
companies in the Franklin Templeton
Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales
Manager, Franklin Templeton
Distributors, Inc.; and officer of 33
of the investment companies in the
Franklin Templeton Group
of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$925 per month plus $925 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
Number of Boards
Total Fees Total Fees Received in the Franklin
Received from the Franklin Templeton Group
from the Templeton Group of Funds on Which
Name Trust* of Funds** Each Serves***
Frank H. Abbott, III $21,275 $165,236 32
Harris J. Ashton 21,275 343,591 56
S. Joseph Fortunato 21,275 360,411 58
David Garbellano 21,275 148,916 31
Frank W.T. LaHaye 20,350 139,233 27
Gordon S. Macklin 21,275 335,541 53
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 236
Class I shares, or less than 1% of the outstanding Class I shares of the Fund.
They did not own any Advisor Class shares. Many of the Board members also own
shares in other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle,
respectively, of Charles E.
Johnson.
Investment Management
and Other Services
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers is covered by fidelity insurance on its officers, directors
and employees for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
Under an agreement with Advisers, TICI is the Fund's sub-advisor. TICI provides
Advisers with investment management advice and assistance. Under the
sub-advisory agreement, the sub-advisor provides, subject to Advisers'
discretion, a portion of the investment advisory services for which Advisers is
responsible pursuant to the management agreement. These responsibilities may
include managing a portion of the Fund's investments and supplying research
services. Research services provided by the sub-advisor may include information,
analytical reports, computer screening studies, statistical data and factual
resumes pertaining to securities throughout the world. This supplemental
research, when utilized, is subject to analysis by Advisers before being
incorporated into the investment advisory process. The sub-advisory agreement
provides that the sub-advisor may also select brokers and dealers for execution
of the Fund's portfolio transactions consistent with the Fund's brokerage
policies.
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on net assets of the Fund in excess of $100
million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1% per
year) of net assets of the Fund in excess of $250 million. The fee is computed
at the close of business on the last business day of each month. Each class of
the Fund's shares pays its proportionate share of the management fee. Under the
sub-advisory agreement, Advisers pays TICI a sub-advisory fee, in U.S. dollars,
equal to a rate of 0.35% of the average daily net assets up to and including
$100 million of net assets of the Fund; 0.25% of average daily net assets over
$100 million up to and including $250 million; and 0.20% of average daily net
assets over $250 million. This fee is not a separate expense of the Fund but is
paid by Advisers from the management fees it receives from the Fund.
For the fiscal years ended October 31, 1994, 1995 and 1996, management fees
totaling $1,130,298, $984,273 and $866,730, respectively, were paid to Advisers.
For the same periods, Advisers paid TICI sub-advisory fees of $244,263, $530,209
and $473,601, respectively.
Management Agreements. The management and sub-advisory agreements are in effect
until February 28, 1998. They may continue in effect for successive annual
periods if their continuance is specifically approved at least annually by a
vote of the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, and in either event by a majority vote of the
Board members who are not parties to either agreement or interested persons of
any such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the Fund's outstanding voting securities, or by Advisers on 30 days' written
notice, and will automatically terminate in the event of its assignment, as
defined in the 1940 Act. The sub-advisory agreement may be terminated without
penalty at any time by the Board or by vote of the holders of a majority of the
Fund's outstanding voting securities, or by either Advisers or TICI on not less
than 60 days' written notice, and will automatically terminate in the event of
its assignment, as defined in the 1940 Act.
Administrative Services. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
Shareholder Servicing Agent. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. If this happens,
the Fund may pay the third party an annual sub-transfer agency fee that is not
more than the Fund otherwise would have paid for these services.
Custodians. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Trust's independent auditors. During the fiscal year ended
October 31, 1996, their auditing services consisted of rendering an opinion on
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
How does the Fund Buy
Securities for its Portfolio?
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. The Fund seeks to obtain prompt execution
of orders at the most favorable net price. Transactions may be directed to
dealers in return for research and statistical information, as well as for
special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, consistent with
internal policies, the sale of Fund shares, as well as shares of other funds in
the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid no
brokerage commissions. As of October 31, 1996, the Fund did not own securities
of its regular broker-dealers.
How Do I Buy, Sell and Exchange Shares?
Additional Information on Buying Shares
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund, we may impose a $10 charge against your account for each returned
item.
Other Payments to Securities Dealers. Distributors and/or its affiliates provide
financial support to various Securities Dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares. The amount of support may be affected by: total sales; net
sales; levels of redemptions; the proportion of a Securities Dealer's sales and
marketing efforts in the Franklin Templeton Group of Funds; a Securities
Dealer's support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers may
be made by payments from Distributors' resources, from Distributors' retention
of underwriting concessions and, in the case of funds that have Rule 12b-1
plans, from payments to Distributors under such plans. In addition, certain
Securities Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's rules.
Reinvestment Date. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
Additional Information on Exchanging Shares
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell 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 occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
Additional Information on Selling Shares
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the prior business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
General Information
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
How are Fund Shares Valued?
We calculate the Net Asset Value per share of each class of the Fund's shares as
of the scheduled close of the NYSE, generally 1:00 p.m. Pacific time, each day
that the NYSE is open for trading. As of the date of this SAI, the Fund is
informed that the NYSE observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers.
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 before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Net Asset Value is not calculated. Thus, the calculation of the Net
Asset Value does not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in the calculation and, if
events materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
Additional Information on
Distributions and Taxes
Distributions
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the form of 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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the prior fiscal year.
The Fund may make more than one distribution derived from net short-term and net
long-term capital gains in any year or adjust the timing of these distributions
for operational or other reasons.
Taxes
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, the portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the deduction will be declared by the Fund annually in a notice
to shareholders mailed shortly after the end of the Fund's fiscal year.
Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by a
Fund as a dividend will not qualify for the dividends received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that its distributions will be sufficient to
avoid any or all federal excise taxes.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Group of Funds 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. You should consult with your tax advisors concerning the rules
applicable to the redemption or exchange of Fund shares.
Gain realized by the Fund from transactions entered into after April 30, 1993
that are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount". A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent the
applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.
The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules. For
example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes, will be subject to
tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse, or closing out of the
option or sale of the underlying stock or security. By contrast, the Fund
treatment of certain other options, futures and forward contracts entered into
by the Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contacts and
options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and time of income distributed to shareholders by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income").
This requirement may limit the Fund's ability to engage in options, straddles,
hedging transactions and forward or futures contracts because these transactions
are often consummated in less than three months, may require the sale of
portfolio securities held less than three months and may, as in the case of
short sales of portfolio securities reduce the holding periods of certain
securities within the Fund, resulting in additional short-short income for the
Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn its distributions to shareholders.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and also conform to the aforementioned
30% gross income test. Foreign exchange gains derived by a Fund with respect to
the Fund's business of investing in stock or securities, or options or futures
with respect to such stock or securities, is qualifying income for purposes of
this 90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Series does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income on a portion of any "excess distribution" it receives from the PFIC or
any gain it derives from the disposition of such shares, even if such income is
distributed as a taxable dividend by the Fund to its U.S. shareholders. The Fund
may also be subject to additional interest charges in respect of deferred taxes
arising from such distributions or gains. Any federal income tax paid by the
Fund as a result of its ownership on shares of a PFIC will not give rise to a
deduction or credit to the Fund or to any shareholder. A PFIC means any foreign
corporation if, for the taxable year involved, either (i) it derives at least 75
percent of its income from "passive income" (including, but not limited to,
interest, dividends, royalties, rents and annuities), or (ii) on average, at
least 50 percent of the value (or adjusted basis, if elected) of the assets held
by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by such countries. If
more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible and intends to elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. Pursuant to this election, you will be
required to include in gross income (in addition to taxable dividends actually
received) your pro rata share of the foreign taxes paid by the Fund, and will be
entitled either to deduct (as an itemized deduction) your pro rata share of
foreign income and similar taxes in computing your taxable income or to use it
as a foreign tax credit against your U. S. Federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed by you if you do
not itemize deductions, but you may be eligible to claim the foreign tax credit
(see below). You will be notified within 60 days after the close of the Fund's
taxable year whether the foreign taxes paid by the Fund will "pass through" for
that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed your U.S. tax attributable to your foreign source taxable income. For
this purpose, if the pass-through election is made, the source of the Fund's
income flows through to its shareholders. With respect to the Fund, gains from
the sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be treated
as ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as defined for
purposes of the foreign tax credit), including the foreign source passive income
passed through by the Fund. You may be unable to claim a credit for the full
amount of your proportionate share of the foreign taxes paid by the Fund.
Foreign taxes may not be deducted in computing alternative minimum taxable
income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If the Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by the Fund will be treated as U.S.
source income.
The Fund's Underwriter
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
How does the Fund Measure Performance?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized performance
quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or express
performance for Advisor Class follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
Total Return
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at Net
Asset Value. The quotation assumes the account was completely redeemed at the
end of each one-, five- and ten-year period and the deduction of all applicable
charges and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum front-end sales
charge currently in effect.
The average annual total return for Advisor Class for the one-, five-year and
since inception (March 15, 1988) periods ended October 31, 1996, would have been
11.80%, 7.37% and 8.03%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T ) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
Cumulative Total Return. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, will be based on the actual
return for each class for a specified period rather than on the average return
over one-, five- and ten-year periods, or fractional portion thereof. The
cumulative total return for Advisor Class for the one-, five-year and since
inception (March 15, 1988) periods ended October 31, 1996, would have been
11.80%, 42.69% and 94.78%, respectively.
Yield
Current Yield. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share of Advisor Class
earned during a 30-day base period by the Net Asset Value per share on the last
day of the period and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of the class during the base
period. The yield for Advisor Class for the 30-day period ended October 31,
1996, would have been 6.32%.
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the Net Asset Value per share on the last day of the period
Current Distribution Rate
Current yield which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. For Advisor Class, the current distribution rate is usually computed by
annualizing the dividends paid per share by the class during a certain period
and dividing that amount by the current Net Asset Value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains and is calculated over a different period of time. The current
distribution rate for Advisor Class for the 30-day period ended October 31,
1996, would have been 6.94%.
Volatility
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
Other Performance Quotations
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
Comparisons
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) Lipper- Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
d) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
e) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
f) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
g) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
h) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
i) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
j) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
k) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index or its component indices - The Aggregate Bond Index measures yield,
price and total return for Treasury, Agency, Corporate, Mortgage, and Yankee
bonds.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Yields and total return of other taxable investments including certificates
of deposit (CDs), money market deposit accounts (MMDAs), checking accounts,
savings accounts, money market mutual funds, and repurchase agreements.
n) Yields of other countries' government and corporate bonds as compared to U.S.
Government and corporate bonds to illustrate the potentially higher returns
available outside the United States.
o) Salomon Brothers World Government Bond Index covers the available market for
domestic Government bonds worldwide. It includes all fixed-rate bonds with a
remaining maturity of one year or longer with amounts outstanding of at least
the equivalent of $25 million dollars. The index provides an accurate,
replicable fixed income benchmark for market performance. Returns are in local
currency.
p) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the performance of Advisor Class
to the return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
Miscellaneous Information
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.6 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund, Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
As of February 3, 1997, the principal shareholder of the Fund, beneficial or of
record, was as follows:
Name and Address Share Amount Percentage
NFSC FEBO
Mark C. Yahle
1565 Sea Gull Drive
Titusville, FL 32796 22,564.325 5.862%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
Financial Statements
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein
by reference.
Useful Terms and Definitions
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
NASD - National Association of Securities
Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
Prospectus - The prospectus for Advisor Class shares of the Fund dated March 1,
1997, as may be amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that,
either directly or through affiliates, has an agreement with Distributors to
handle customer orders and accounts with the Fund. This reference is for
convenience only and does not indicate a legal conclusion of capacity.
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
FRANKLIN SHORT- INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
ADVISOR CLASS
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?.............. 2
Investment Restrictions........................... 3
Officers and Trustees............................. 4
Investment Management
and Other Services............................... 8
How does the Fund Buy Securities
for its Portfolio?............................... 9
How Do I Buy, Sell and Exchange Shares?........... 10
How are Fund Shares Valued?....................... 12
Additional Information on
Distributions and Taxes.......................... 12
The Fund's Underwriter............................ 13
How does the Fund Measure Performance?............ 14
Miscellaneous Information......................... 16
Financial Statements.............................. 17
Useful Terms and Definitions...................... 17
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
The Franklin Short-Intermediate U.S. Government Securities Fund (the "Fund") is
a diversified series of Franklin Investors Securities Trust (the "Trust"), an
open-end management investment company. The Fund's investment objective is to
provide as high a level of current income as is consistent with prudent
investing while seeking preservation of shareholders' capital. The Fund seeks to
achieve its objective by investing in a portfolio of U.S. government securities
with primary emphasis on securities with remaining maturities of 31/2 years or
less.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated March
1, 1997, as may be amended from time to time, contains the basic information you
should know before investing in the Fund. For a free copy, call 1-800/DIAL BEN
or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
The Fund's investments will include obligations of the U.S. government and its
agencies or instrumentalities, some of which, such as Government National
Mortgage Association participation certificates, carry a guarantee backed by the
full faith and credit of the U.S. government. The Fund is designed for
individuals and institutional accounts, such as corporations, banks, savings and
loan associations, trust companies and other entities.
CREDIT UNION INVESTMENT REGULATIONS. This section summarizes the Fund's
investment policies under which, in the opinion of the Fund and based on the
Fund's understanding of laws and regulations governing investments by federal
credit unions on October 31, 1996, the Fund would be a permissible investment
for federal credit unions. CREDIT UNION INVESTORS ARE ADVISED TO CONSULT THEIR
OWN LEGAL ADVISERS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE
FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
All investments of the Fund will be subject to the following limitations:
(a) The Fund will invest only in (1) obligations of, or securities guaranteed as
to principal and interest by, the U.S. government or its agencies and
instrumentalities, (2) time and savings deposits in financial institutions whose
accounts are insured by the FDIC, and (3) mortgage related securities.
Mortgage-related securities are interests or participations in, or other
securities secured by, first mortgages initiated by state or federally regulated
or HUD-approved lenders, and are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. The Fund does not intend to invest in time and savings deposits or
mortgage related securities.
(b) All purchases and sales of securities will be settled on a cash basis within
30 days of the trade date. The Fund, however, may agree to settle a purchase or
sale transaction on a specific date up to 120 days after the trade date if, on
the trade date, the Fund has cash flow projections evidencing its ability to
complete the purchase or the Fund owns the security it has agreed to sell.
(c) Any repurchase agreements, in which the Fund purchased U.S. government
securities subject to resale to a bank or dealer at an agreed-upon price and
date, would be subject to these conditions: the value of the U.S. government
securities will equal or exceed the initial price of the repurchase agreement,
plus interest; and a cus- todian of the Fund will hold the U.S. government
securities in an account for the benefit of the Fund.
(d) Although the Fund does not currently intend to invest in reverse repurchase
agreements, in the event that the Fund were to engage in such transactions, the
Fund would, in addition to abiding by its fundamental policies and the
regulations of the SEC with respect to borrowing, engage in reverse repurchase
transactions involving only securities with maturity dates earlier than the
closing date of the reverse repurchase agreement.
(e) The Fund will not engage in (1) futures or options transactions; (2) short
sales; or (3) purchases of zero-coupon bonds that mature more than ten years
after the purchase date.
(f) Although the Fund does not intend, as of the date of this SAI, to invest in
derivative mortgage-backed securities, such as collateralized mortgage
obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"),
which represent non-proportional interests ("tranches" or "classes") in pools of
mortgage loans, any investments by the Fund in such securities would be subject
to the following conditions. In general, the Fund may only invest in CMOs or
REMICs that either: (1) based on testing, at the time of purchase and at least
annually thereafter, have an average life that would be extended or shortened by
less than 6 years under modeling scenarios where mortgage commitment rates
immediately rise or fall 300 basis points; or (2) have an adjustable rate which
(i) resets at least annually, (ii) may rise to a maximum allowable rate at least
300 basis points above the rate at the time of purchase and (iii) adjusts
directly with (rather than inversely to or as a multiple of) the interest rate
index on which it is based. In addition, the Fund may hold derivative
mortgage-backed securities which fail these tests at the time of investment or
at the time of any subsequent test, provided that the securities are held solely
to reduce interest rate risk and that the Fund confirms on a quarterly basis
that the security will reduce the Fund's interest rate risk by using a
monitoring and reporting system that enables the Fund to evaluate the actual and
expected performance of the security under different interest rate scenarios.
OTHER POLICIES. There are no restrictions or limitations on investments in
obligations of the U.S. or of corporations chartered by Congress as federal
government instrumentalities. In the case of the Fund, the underlying assets may
be retained in cash, including cash equivalents which are Treasury bills,
commercial paper and short-term bank obligations such as certificates of
deposit, bankers' acceptances and repurchase agreements. It is intended,
however, that only so much of the underlying assets of the Fund be retained in
cash as is deemed desirable or expedient under then-existing market conditions.
The Fund may purchase securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), which carries a guarantee backed by the full faith and
credit of the U.S. Treasury. The GNMA may borrow from the U.S. Treasury to the
extent needed to make payments under its guarantee. No assurances can be given,
however, that the U.S. government will provide financial support to the
obligations of the other U.S. government agencies or instrumentalities in which
the Fund may invest, since it is not obligated to do so. These agencies and
instrumentalities are supported by either the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury, the discretionary
authority of the U.S. government to purchase certain obligations of an agency or
instrumentality, or the credit of the agency or instrumentality.
ILLIQUID SECURITIES. The Fund may invest up to 10% of its net assets in illiquid
securities, a term which means securities that cannot be disposed of within
seven days in the normal course of business at approximately the amount at which
the Fund has valued the securities and includes, among other things, repurchase
agreements of more than seven days duration, over-the-counter options and the
assets used to cover such options, and other securities which are not readily
marketable. Investments in savings deposits are generally considered illiquid
and will, together with other illiquid investments, not exceed 10% of the Fund's
total net assets. Notwithstanding this limitation, the Board has authorized the
Fund to invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933, as amended (the
"1933 Act") ("restricted securities"), where such investment is consistent with
the Fund's investment objective and has authorized such securities to be
considered liquid to the extent Advisers determines that there is a liquid
institutional or other market for such securities. For example, restricted
securities that may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the 1933 Act, and for which a liquid institutional
market has developed will be considered liquid even though such securities have
not been registered pursuant to the 1933 Act. The Board will review any
determination by Advisers to treat a restricted security as a liquid security on
an ongoing basis, including Advisers' assessment of current trading activity and
the availability of reliable price information. In determining whether a
restricted security is properly considered a liquid security, Advisers and the
Board will take into account the following factors: (i) the frequency of trades
and quotes for the security; (ii) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer). To the extent the Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the Fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts. The Fund has not
purchased and does not intend, currently, to purchase illiquid or restricted
securities.
WHAT ARE THE FUND'S POTENTIAL RISKS?
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of the Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of the Fund's total assets
at the time of the most recent loan. The entry into repurchase agreements is not
considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of the Fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer. To the
extent permitted by exemptions granted under the 1940 Act, the Fund may invest
in shares of money market funds managed by Advisers or its affiliates.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer if, to the knowledge of the Trust, one or more
of its officers, trustees or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. At present, there are no options listed for
trading on a national securities exchange covering the types of securities which
are appropriate for investment by the Fund and, therefore, there are no option
transactions available for the Fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; or except to the extent
the Fund invests its uninvested daily cash balances in shares of the Franklin
Money Fund and other money market funds in the Franklin Group of Funds provided
i) its purchases and redemptions of such money fund shares may not be subject to
any purchase or redemption fees, ii) its investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the Fund's shares (as determined under Rule 12b-1, as amended under
the federal securities laws) and iii) provided aggregate investments by the Fund
in any such money fund do not exceed (A) the greater of (i) 5% of the Fund's
total net assets or (ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money fund.
13. Issue senior securities, as defined in the 1940 Act, except that this
restriction will not prevent the Fund from entering into repurchase agreements
or making borrowings, mortgages and pledges as permitted by restriction #1
above.
Restriction No. 9 above does not prevent the Fund from investing in real estate
investment trusts ("REITs") if they meet the investment objective and policies
of the Fund.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome St.
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director, trustee
or managing general partner, as the case may be, of 56 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (82) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 32 of the investment companies in the
Franklin Templeton Group of Funds.
*Edward B. Jamieson (48) President and
777 Mariners Island Blvd. Trustee
San Mateo, CA 94404
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of five of the investment companies in the
Franklin Templeton Group of Funds.
*Charles B. Johnson (64) Chairman of the
777 Mariners Island Blvd. Board and
San Mateo, CA 94404 Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.
(software firm); Director, FischerImaging Corporation (medical imaging systems);
and director or trustee, as the case may be, of 27 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (information and financial services);
Director, Fund American Enterprises Holdings, Inc. (financial services), MCI
Communications Corporation, CCC Information Services Group, Inc. (information
services), MedImmune, Inc. (biotechnology), Source One Mortgage Services
Corporation (financial services), Shoppers Express (home shopping), Spacehab,
Inc. (aerospace services); and director, trustee or managing general partner, as
the case may be, of 53 of the investment companies in the Franklin Templeton
Group of Funds; formerly Chairman, Hambrecht and Quist Group (venture capital
and investment banking); Director, H & Q Healthcare Investors (investment
trust); and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc. and Franklin Templeton
Services, Inc.; Director, Franklin/Templeton Investor Services, Inc.; officer
and/or director, as the case may be, of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee of 61 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; President, Franklin Templeton Services, Inc.; Executive Vice
President, Templeton Worldwide, Inc.; Senior Vice President and Treasurer,
Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior Vice
President, Franklin/Templeton Investor Services, Inc.; Treasurer, Franklin
Advisory Services, Inc. and Franklin Investment Advisory Services, Inc.; officer
of most other subsidiaries of Franklin Resources, Inc.; and officer, director
and/or trustee of 61 of the investment companies in the Franklin Templeton Group
of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and officer of 61 of
the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (40) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 39 the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Templeton Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Templeton
Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently paid
$925 per month plus $925 per meeting attended. As shown above, some of the
nonaffiliated Board members also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Templeton Group
of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to non-affiliated Board members by
the Trust and by other funds in the Franklin Templeton Group of Funds.
Number of Boards
Total Fees in the Franklin
Total Fees Received from the Templeton Group
Received from Franklin Templeton of Funds on Which
Name the Trust* Group of Funds** Each Serves***
Frank H. Abbott, III......... $21,275 $165,236 31
Harris J. Ashton ............ 21,275 343,591 55
S. Joseph Fortunato ......... 21,275 360,411 57
David Garbellano ............ 21,275 148,916 31
Frank W.T. LaHaye ........... 20,350 139,233 26
Gordon S. Macklin ........... 21,275 335,541 52
*For the fiscal year ended October 31, 1996.
**For the calendar year ended December 31, 1996.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 62 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of February 3, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 187.552
Class I shares or less than 1% of the total outstanding Class I shares of the
Fund. Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers is covered by fidelity insurance on its officers, directors
and employees for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1%
per year) for the first $100 million of net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on net assets of the Fund in excess of $100
million up to $250 million; and 9/240 of 1% (approximately 45/100 of 1% per
year) of net assets of the Fund in excess of $250 million. The fee is computed
at the close of business on the last business day of each month. Each class of
the Fund's shares pays its proportionate share of the management fee.
For the fiscal year ended October 31, 1994, management fees, before any advance
waiver, totaled $1,370,071. Under an agreement by Advisers to limit its fees,
the Fund paid management fees totaling $1,308,206 for the fiscal year ended
October 31, 1994.
For the fiscal years ended October 31, 1995 and 1996, management fees, before
any advance waiver, totaled $1,187,800 and $1,142,250, respectively, were paid
to Advisers.
MANAGEMENT AGREEMENT. The management agree-ment is in effect until February 28,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 30 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. If this happens,
the Fund may pay the third party an annual sub-transfer agency fee that is not
more than the Fund otherwise would have paid for these services.
CUSTODIANS. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended October
31, 1996, their auditing services consisted of rendering an opinion on the
financial statements of the Fund included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for the
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, consistent with
internal policies, the sale of Fund shares, as well as shares of other funds in
the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid no
brokerage commissions.
As of October 31, 1996, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates provide
financial support to various Securities Dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares. The amount of support may be affected by: total sales; net
sales; levels of redemptions; the proportion of a Securities Dealer's sales and
marketing efforts in the Franklin Templeton Group of Funds; a Securities
Dealer's support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers may
be made by payments from Distributors' resources, from Distributors' retention
of underwriting concessions and, in the case of funds that have Rule 12b-1
plans, from payments to Distributors under such plans. In addition, certain
Securities Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's rules.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the Net Asset Value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell 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 occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the prior business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class of the Fund's shares as
of the scheduled close of the NYSE generally 1:00 p.m. Pacific time, each day
that the NYSE is open for trading. As of the date of this SAI, the Fund is
informed that the NYSE observes the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of 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 are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that 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 Advisers.
Generally, trading in U.S. government securities and money market instruments is
substantially completed each day at various times before the scheduled close of
the NYSE. The value of these securities used in computing the Net Asset Value is
determined as of such times. Occasionally, events affecting the values of these
securities may occur between the times at which they are determined and the
scheduled close of the NYSE that will not be reflected in the computation of the
Net Asset Value. If events materially affecting the values of these securities
occur during this period, the securities will be valued at their fair value as
determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of 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 capital loss carryforward) may generally be
made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the prior fiscal year and
any undistributed capital gains from the prior fiscal year. The Fund may make
more than one distribution derived from net short-term and net long-term capital
gains in any year or adjust the timing of these distributions for operational or
other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but do not guarantee
that their distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount realized from the transaction, subject to the rules described
below. If such shares are a capital asset in the hands of the shareholder, gain
or loss will be capital gain or loss and will be long-term for federal income
tax purposes if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Funds 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. You should
consult with your tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.
Gain realized by the Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion transaction based upon the time value of money, is
computed using a yield equal to 120 percent of the applicable federal rate,
reduced by any prior recharacterizations under this provision or Section 263(g)
of the Code concerning capitalized carrying costs.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for each class of the Fund's shares.
The underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized performance
quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or express
performance for Advisor Class follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at Net
Asset Value. The quotation assumes the account was completely redeemed at the
end of each one-, five- and ten-year period and the deduction of all applicable
charges and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum front-end sales
charge currently in effect.
The average annual total return for Advisor Class for the one- and five-year
periods ended October 31, 1996, and for the period from inception (April 15,
1987) to October 31, 1996, would have been 4.97%, 5.93% and 7.10%, respectively.
These rates of return will be calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV =ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-, five-
or ten-year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, will be based on the actual
return for each class for a specified period rather than on the average return
over one-, five- and ten-year periods, or fractional portion thereof. The
cumulative total return for Advisor Class for the one- and five-year periods
ended October 31, 1996, and for the period from inception (April 15, 1987) to
October 31, 1996, were 4.97%, 33.38% and 92.49%, respectively.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share of Advisor Class
earned during a 30-day base period by the Net Asset Value per share on the last
day of the period and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of the class during the base
period. The yield for Advisor Class for the 30-day period ended October 31,
1996, was 5.22%.
This figure will be obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the Net Asset Value per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. For Advisor Class, the current distribution rate is usually computed by
annualizing the dividends paid per share by the class during a certain period
and dividing that amount by the current Net Asset Value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains and is calculated over a different period of time. The current
distribution rate for Advisor Class for the 30-day period ended October 31,
1996, was 5.60%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
b) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
c) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
d) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines - provide
performance statistics over specified time periods.
e) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
f) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
g) Savings and Loan Historical Interest Rates -
as published in the U.S. Savings & Loan League Fact Book.
h) Salomon Brothers Broad Bond Index or its component indices - the Broad Bond
Index measures yield, price, and total return for Treasury, Agency, Corporate
and Mortgage bonds.
i) Lehman Brothers Aggregate Bond Index or its component indices - the Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage and Yankee bonds.
j) Standard & Poor's Bond Indices - measure yield and price of Corporate,
Municipal and Government bonds.
k) Other taxable investments, including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds and repurchase agreements.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Donoghue's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free and government money funds.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the performance of Advisor Class
to the return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.6 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $179 billion in
assets under management for more than 4.9 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
The Fund is eligible for investment by the National Marine Fisheries Service
Capital Construction Funds.
As of February 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
Share
Name and Address Amount Percentage
CLASS I
City of Scottsdale 1,137,805.805 6.08%
3939 Civic Center Blvd.
Scottsdale, AZ 85251-4433
ADVISOR CLASS
Franklin Resources, Inc. 1,961.4897 6.70%
1850Gateway Dr., 6th Flr.
San Mateo, CA 94404
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund shall,
upon request, assume the defense of any claim made against you for any act or
obligation of the Fund and satisfy any judgment thereon. All such rights are
limited to the assets of the Fund. The Declaration of Trust further provides
that the Fund may maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of the Fund, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the Fund as an investment
company, as distinguished from an operating company, would not likely give rise
to liabilities in excess of the Fund's total assets. Thus, the risk of you
incurring financial loss on account of shareholder liability is limited to the
unlikely circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended October 31, 1996, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND ADVISOR CLASS - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. They differ, however, primarily in their sales charge and
expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
PROSPECTUS - The prospectus for Advisor Class shares of the Fund dated March 1,
1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
