As filed with the Securities and Exchange Commission on December 30, 1998
File Nos.
33-11444
811-4986
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 26 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28 (X)
FRANKLIN INVESTORS SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on March 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (Date) pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Adjustable Rate Securities Portfolios (the Master Funds) have executed
this registration statement.
Title of Securities Being Registered:
Shares of Beneficial Interest:
Franklin Investors Securities Trust
Franklin Global Government Income Fund - Class A
Franklin Global Government Income Fund - Class C
Franklin Global Government Income Fund - Advisor Class
Franklin Short-Intermediate U.S. Government Securities Fund - Class A
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
Franklin Convertible Securities Fund - Class A
Franklin Convertible Securities Fund - Class C
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund - Class A
Franklin Equity Income Fund - Class B
Franklin Equity Income Fund - Class C
Franklin Adjustable Rate Securities Fund
Franklin Bond Fund - Class A
Franklin Bond Fund - Advisor Class
Prospectus
FRANKLIN INVESTORS SECURITIES TRUST
INVESTMENT STRATEGY Franklin Convertible Securities Fund -
GROWTH & INCOME Class A & C
Franklin Equity Income Fund -
Class A, B & C
INVESTMENT STRATEGY Franklin Global Government
GLOBAL INCOME Income Fund - Class A & C
INVESTMENT STRATEGY Franklin Short-Intermediate
INCOME U.S. Government Securities Fund -
Class A
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Franklin Convertible Securities Fund
[insert page #] Franklin Equity Income Fund
[insert page #] Franklin Global Government Income Fund
[insert page #] Franklin Short-Intermediate U.S. Government
Securities Fund
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN CONVERTIBLE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to maximize total return, consistent with
reasonable risk, by seeking to optimize capital appreciation and high current
income under varying market conditions.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its net
assets in convertible securities (and common stock received upon conversion
or exchange of 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.
[Begin callout]
The fund invests primarily in convertible securities.
[End callout]
A convertible security shares features of equity and debt securities. Like a
debt security, a convertible security provides a fixed income stream. A
convertible security also tends to increase in market value when interest
rates decline and decrease in value when interest rates rise. Like an equity
security, a convertible security offers the potential for capital
appreciation resulting from an increase in the price of the underlying
stock. The value of a convertible security also tends to increase as the
market value of the underlying stock rises, and to decrease as the market
value of the underlying stock declines. Because both interest rate and
market movements can influence its value, 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 also invest in convertible securities that have been structured
to provide enhanced characteristics such as yield enhancement, increased
equity exposure, or enhanced downside protection. These securities typically
include a conversion premium at issuance or some other benefit to the issuer
in exchange for the enhanced features.
The fund may invest up to 100% of total assets in securities that are below
investment grade. Investment grade securities are rated in the top four
ratings categories by independent rating organizations such as Standard &
Poor's Corporation (S&P) and Moody's Investors Service, Inc. (Moody's). The
fund generally invests in securities rated at least B by Moody's or S&P or
unrated securities the fund's manager determines are comparable. Generally,
lower rated securities pay higher yields than more highly rated securities to
compensate investors for the higher risk.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal, because it may not invest or may invest less in convertible securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
LIQUIDITY The fund may have difficulty disposing of some convertible
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio.
INTEREST RATE When interest rates rise, fixed income security prices fall.
The opposite is also true: fixed income security prices go up when interest
rates fall. Generally, interest rates rise during times of inflation or a
growing economy, and will fall during an economic slowdown or recession.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more risk than higher-rated securities. The principal risks of
investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield fixed-income
securities are not as strong financially as those with higher credit
ratings. These companies are more likely to encounter financial
difficulties and are more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates, that could
prevent them from making interest and principal payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its
entire investment.
o VOLATILITY RISK. The prices of high yield fixed-income securities
fluctuate more than higher-quality securities. Prices are especially
sensitive to developments affecting the company's business and to changes
in the ratings assigned by ratings organizations. Prices are often
closely linked with the company's stock prices and typically rise and fall
in response to factors that affect stock prices. In addition, the entire
high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large
sustained sales by major investors, a high-profile default, or other
factors. High yield securities are also generally less liquid than
higher-quality bonds. Many of these securities do not trade frequently,
and when they do trade their prices may be significantly higher or lower
than expected. At times, it may be difficult to sell these securities
promptly at an acceptable price, which may limit the fund's ability to
sell securities in response to specific economic events or to meet
redemption requests.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
EURO On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
12.16% -5.76% 33.62% 16.24% 20.54% -1.63% 24.19% 16.33% 20.27% []%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Convertible Securities xx% xx% xx%
Fund - Class A 2
Goldman Sachs Convertible 100 xx% xx% xx%
Index 3
SINCE
INCEPTION
1 YEAR (10/2/95)
- --------------------------------------------------------------------------
Franklin Convertible Securities xx% xx%
Fund - Class C 2
Goldman Sachs Convertible 100 xx% xx%
Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. The unmanaged Goldman Sachs Convertible 100 Index is comprised of a target
of 100 securities, including convertible bonds, preferreds, and mandatory
convertible securities. It includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS C1
- -----------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 1.99%
Paid at time of purchase 5.75% 1.00%
Paid at redemption None2 0.99%3
Exchange fee4 None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS C1
- -----------------------------------------------------------------
Management fees 0.55% 0.55%
Distribution and service
(12b-1) fees5 0.25% 1.00%
Other expenses 0.18% 0.18%
-------------------------
Total annual fund operating expenses 0.98% 1.73%
-------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
3. This is equivalent to a charge of 1% based on net asset value.
4. There is a $5 fee for each exchange by a market timer (see page [#]).
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $669 1 $869 $1,086 $1,707
CLASS C $372 2 $639 $1,029 $2,121
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $274 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.
The team responsible for the fund's management is:
EDWARD B. JAMIESON, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Jamieson has been a manager of the fund since 1987. He joined the
Franklin Templeton Group in 1987.
EDWARD D. PERKS, VICE PRESIDENT OF ADVISERS
Mr. Perks has been a manager of the fund since November 1998. He joined the
Franklin Templeton Group in October 1992.
RAYMOND CHAN, PORTFOLIO MANAGER OF ADVISERS
Mr. Chan has been a manager of the fund since June 1998. He joined the
Franklin Templeton Group in 1996.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund
paid 0.55% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly representing its net investment income. Capital gains, if any,
may be distributed annually. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax advisor about federal, state, local or foreign
tax consequences of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 3 1994
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 14.74 13.45 12.73 12.34 12.79
-------------------------------------------------
Net investment income .62 .64 .61 .58 .59
Net realized and unrealized
gains (losses) (1.92) 2.15 1.39 1.10 (.33)
-------------------------------------------------
Total from investment
operations (1.30) 2.79 2.00 1.68 .26
-------------------------------------------------
Dividends from net
investment income (.65) (.60) (.60) (.59) (.59)
Distributions from net
realized gains (1.04) (.90) (.68) (.70) (.12)
-------------------------------------------------
Total distributions (1.69) (1.50) (1.28) (1.29) (.71)
-------------------------------------------------
Net asset value, end of year 11.75 14.74 13.45 12.73 12.34
-------------------------------------------------
Total return (%)1 (9.93) 22.47 16.71 15.18 2.07
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 170,569 212,631 130,951 83,523 66,869
Ratios to average net
assets: (%)
Expenses .98 1.01 1.02 1.03 .84
Expenses excluding waiver
and payments by affiliate - - - - .92%
Net investment income 4.63 4.81 4.79 4.82 4.84
Portfolio turnover rate (%) 79.17 141.49 129.83 108.64 68.39
CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 14.68 13.41 12.71 13.06
----------------------------------------
Net investment income .51 .54 .51 .07
Net realized and unrealized
gains (losses) (1.91) 2.13 1.40 (.37)
----------------------------------------
Total from investment
operations (1.40) 2.67 1.91 (.30)
----------------------------------------
Dividends from net
investment income (.54) (.50) (.53) (.05)
Distributions from net
realized gains (1.04) (.90) (.68) -
----------------------------------------
Total distributions (1.58) (1.40) (1.21) (.05)
----------------------------------------
Net asset value, end of year 11.70 14.68 13.41 12.71
----------------------------------------
Total return (%)1 (10.61) 21.54 15.92 (2.33)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 41,533 35,282 10,861 209
Ratios to average net
assets: (%)
Expenses 1.73 1.74 1.79 1.60 2
Net investment income 3.93 4.04 4.00 3.64 2
Portfolio turnover rate (%) 79.17 141.49 129.83 108.64
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. For the period October 1, 1995 (effective date) to October 31, 1995 for
Class C.
FRANKLIN EQUITY INCOME FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to maximize total return through emphasis
on high current income and long-term capital appreciation, consistent with
reasonable risk.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its net
assets in common stocks offering current dividend yields above the average of
the market, as defined by the Standard & Poor's 500 Index.
[Begin callout]
The fund's principal investments are in common stocks.
[End callout]
The fund may invest up to 35% of its net assets in other securities, such as
convertible securities, fixed-income securities, REITs, and foreign
securities, including depositary receipts. A convertible security is a
security, such as a fixed-income security or a preferred stock, that is
convertible into common stock. The fund does not intend to invest more than
15% of its assets in convertible securities. The fund may invest up to 15%
of its assets in real estate investment trusts (REITs).
The fund's manager evaluates the common stock dividend yields of many
financially strong companies as compared to the average dividend yield of the
Standard & Poor's 500 Index. This results in a unique relative yield range
for each company. The manager believes that high relative dividend yield is
frequently accompanied by a lower stock price. The fund seeks to buy a stock
when its relative dividend yield is high and 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.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal, because it may not invest or may invest less in common stocks.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
Generally, interest rates rise during times of inflation or a growing
economy, and will fall during an economic slowdown or recession. Securities
with longer maturities usually are more sensitive to interest rate changes
than securities with shorter maturities.
REITS Changes in the market value of the fund's investments in REIT
securities will affect its performance. A REIT's performance depends on the
types and locations of the properties it owns and on how well it manages
those properties. The value of a REIT may also be affected by factors that
affect the underlying properties, the real estate industry, or local or
general economic conditions.
FINANCIAL SERVICES COMPANIES Because the fund invests in stocks of companies
in the financial services industry, the fund's investments and performance
will be affected by general market and economic conditions as well as other
risk factors particular to the financial services industry. Financial
services companies are subject to extensive government regulation. This
regulation may affect a financial company's profitability by limiting the
amount and types of loans and commitments it can make and the interest rates
and fees it can charge. A financial company's profitability, and therefore
its stock price, is especially sensitive to interest rate changes, as well as
to the ability of borrowers to repay their loans.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
offer significant opportunities for gain, but they also involve additional
risks that can increase the potential for losses in the fund. Investments in
depositary receipts also involve some or all of the following risks.
COUNTRY RISK. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns which trade in that country. These movements will affect the fund's
share price.
COMPANY RISK. Foreign companies are not subject to the same accounting,
auditing and financial reporting standards and practices as U.S. companies
and their stocks may not be as liquid as stocks of similar U.S. companies.
Foreign stock exchanges, brokers and companies generally have less government
supervision and regulation than in the U.S.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
23.96% -8.84% 28.21% 13.25% 17.83% -0.33% 25.73% 12.73% 27.21% []%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Equity Income Fund - xx% xx% xx%
Class A 2
S&P 500(R)Index 3 xx% xx% xx%
SINCE
INCEPTION
1 YEAR (10/2/95)
- --------------------------------------------------------------------------
Franklin Equity Income Fund - xx% xx%
Class C 2
S&P 500(R)Index 3 xx% xx%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Paid at time of purchase 5.75% None 1.00%
Paid at redemption None3 4.00% 0.99%4
Exchange fee5 None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS B2 CLASS C1
- ----------------------------------------------------------------------------
Management fees 0.50% 0.50% 0.50%
Distribution and service
(12b-1) fees6 0.25% 1.00% 1.00%
Other expenses 0.19% 0.19% 0.19%
------------------------------------
Total annual fund operating expenses 0.94% 1.69% 1.69%
------------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended October 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. There is a $5 fee for each exchange by a market timer (see page [#]).
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $665 1 $857 $1,065 $1,663
CLASS B
Assuming you sold your shares
at the end of the period $572 $833 $1,118 $1,799 2
Assuming you stayed in the fund $172 $533 $918 $1,799 2
CLASS C $368 3 $627 $1,009 $2,078
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $270 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.
The team responsible for the fund's management is:
FRANK FELICELLI CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Felicelli has been a manager of the fund since 1988. He joined the
Franklin Templeton Group in 1986.
KENT P. SHEPHERD CFA, VICE PRESIDENT OF ADVISERS
Mr. Shepherd has been a manager of the fund since August 1998. He joined the
Franklin Templeton Group in 1991.
HOWARD M. MCELDOWNEY, PORTFOLIO MANAGER OF ADVISERS
Mr. McEldowney has been generally involved with the investment strategy of
the Equity Fund's portfolio since its inception. He joined the Franklin
Templeton Group in 1984.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund
paid 0.50% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly representing its net investment income. Capital gains, if any,
may be distributed annually. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax advisor about federal, state, local or foreign
tax consequences of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 3 1994
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 19.31 16.41 15.19 14.14 14.91
--------------------------------------------------
Net investment income .64 .64 .64 .63 .62
Net realized and unrealized
gains (losses) 1.42 3.23 1.63 1.27 (.36)
--------------------------------------------------
Total from investment
operations 2.06 3.87 2.27 1.90 .26
--------------------------------------------------
Dividends from net
investment income (.65) (.64) (.65) (.61) (.72)
Distributions from net
realized gains (.79) (.33) (.40) (.24) (.31)
--------------------------------------------------
Total distributions (1.44) (.97) (1.05) (.85) (1.03)
--------------------------------------------------
Net asset value, end of year 19.93 19.31 16.41 15.19 14.14
--------------------------------------------------
Total return (%)1 10.96 24.40 15.39 14.10 1.83
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 428,228 352,555 246,952 168,897 92,763
Ratios to average net
assets: (%)
Expenses .94 .97 .98 1.00 .77
Expenses excluding waiver
and payments by affiliate - - - 1.02% .95%
Net investment income 3.20 3.62 4.11 4.44 4.53
Portfolio turnover rate (%) 30.65 29.04 24.15 27.86 39.51
CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 19.26 16.38 15.19 15.38
-----------------------------------------
Net investment income .50 .50 .52 .05
Net realized and unrealized
gains (losses) 1.41 3.22 1.63 (.19)
-----------------------------------------
Total from investment
operations 1.91 3.72 2.15 (.14)
-----------------------------------------
Dividends from net
investment income (.50) (.51) (.56) (.05)
Distributions from net
realized gains (.79) (.33) (.40) -
-----------------------------------------
Total distributions (1.29) (.84) (.96) (.05)
-----------------------------------------
Net asset value, end of year 19.88 19.26 16.38 15.19
-----------------------------------------
Total return (%)1 10.16 23.40 14.53 (.93)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 81,078 45,277 18,227 386
Ratios to average net
assets: (%)
Expenses 1.69 1.72 1.73 1.99 2
Net investment income 2.45 2.78 3.33 3.57 2
Portfolio turnover rate (%) 30.65 29.04 24.15 27.86
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. For the period October 1, 1995 (effective date) to October 31, 1995 for
Class C.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide high current income,
consistent with preservation of capital, with capital appreciation as a
secondary consideration.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its total
assets in government securities at least 3 different countries, including the
United States. Government securities include securities issued or guaranteed
by domestic and foreign governments and their political subdivisions. In
addition to government securities, the fund also invests in other
fixed-income securities, such as bonds, notes, and debentures.
[Begin callout]
The fund invests primarily in U.S. and foreign government debt obligations.
[End callout]
The fund normally invests its assets principally within Australia, Canada,
Japan, New Zealand, the U.S., and Western Europe. The fund also invests in
debt securities of supranational entities, and in semi-governmental
securities, which are securities that are not backed by the full faith and
credit and general taxing powers of the government, or that have only its
implied backing. The fund may invest up to 30% of its net assets in
securities of less developed and developing countries.
The securities the fund buys may be denominated in any currency, or in
multinational currency units, and the fund may hold foreign currency. The
fund also uses forward currency exchange contracts to seek to protect or
enhance income or to protect capital. A forward currency exchange contract
is an obligation to buy or sell a specific currency for an agreed price at a
future date.
The fund may invest up to 35% of total assets in debt securities that are
below investment grade. Investment grade securities are rated in the top four
ratings categories by independent rating organizations such as Standard &
Poor's Corporation (S&P) and Moody's Investors Service, Inc. (Moody's). The
fund generally invests in securities rated at least B by Moody's or S&P or
unrated securities the fund's manager determines are comparable. Generally,
lower rated securities pay higher yields than more highly rated securities to
compensate investors for the higher risk.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal, because it may not invest or may invest less in U.S. and foreign
government securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, fixed-income security prices fall.
The opposite is also true: fixed-income security prices rise when interest
rates fall. Generally, interest rates rise during times of inflation or a
growing economy, and will fall during an economic slowdown or recession.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of all the fund's debt securities will
fall and so too will the fund's share price. This means you could lose money.
[End callout]
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more risk than higher-rated securities. The principal risks of
investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Issuers of high yield debt securities are not as
strong financially as those with higher credit ratings. These issuers are
more likely to encounter financial difficulties and are more vulnerable to
changes in the economy, such as a recession or a sustained period of
rising interest rates, that could prevent them from making interest and
principal payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its
entire investment.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to changes
in the ratings assigned by ratings organizations. In addition, the entire
high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large
sustained sales by major investors, a high-profile default, or other
factors. High yield securities are also generally less liquid than
higher-quality bonds. Many of these securities do not trade frequently,
and when they do trade their prices may be significantly higher or lower
than expected. At times, it may be difficult to sell these securities
promptly at an acceptable price, which may limit the fund's ability to
sell securities in response to specific economic events or to meet
redemption requests.
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks
that can increase the potential for losses in the fund.
COUNTRY RISK. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns that trade in that country. These movements will affect the fund's
share price. The political, economic and social structures of some countries
the fund invests in may be less stable and more volatile than those in the
U.S. The risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets and punitive taxes. The
fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened
risks due to a lack of legal, business and social frameworks to support
securities markets. While short-term volatility in these markets can be
disconcerting, declines of 40% to 50% are not unusual.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each issuer and its major suppliers to
verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
5.60% 7.59% 14.23% -0.25% 18.63% -7.76% 18.07% 10.76% 2.81% []%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Global Government xx% xx% xx%
Income Fund - Class A 2
JP Morgan Global Government Bond xx% xx% xx%
Total Return Index 3
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------
Franklin Global Government xx% xx%
Income Fund - Class C 2
JP Morgan Global Government Bond xx% xx%
Total Return Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. The unmanaged JP Morgan Global Government Bond Total Return Index includes
only actively traded fixed-rate bonds with a remaining maturity of one year
or longer. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS C1
- -----------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 1.99%
Paid at time of purchase 4.25% 1.00%
Paid at redemption None2 0.99%3
Exchange fee4 None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS C1
- -----------------------------------------------------------------
Management fees 0.60% 0.60%
Distribution and service
(12b-1) fees5 0.11% 0.65%
Other expenses 0.25% 0.25%
-------------------------
Total annual fund operating expenses 0.96% 1.50%
-------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
3. This is equivalent to a charge of 1% based on net asset value.
4. There is a $5 fee for each exchange by a market timer (see page [#]).
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $519 1 $718 $933 $1,553
CLASS C $349 2 $569 $910 $1,873
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $251 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.
The team responsible for the fund's management is:
THOMAS J. DICKSON, VICE PRESIDENT OF TEMPLETON INVESTMENT COUNSEL, INC.
Mr. Dickson has been a manager of the fund since 1993. He joined the Franklin
Templeton Group in 1994.
NEIL S. DEVLIN CFA, PORTFOLIO MANAGER OF TEMPLETON INVESTMENT COUNSEL, INC.
Mr. Devlin has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund
paid 0.60% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly representing its net investment income. Capital gains, if any,
may be distributed annually. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate tax.
You should consult your tax advisor about federal, state, local or foreign
tax consequences of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------------------------
1998 1997 1996 1995 3 1994
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 8.41 8.65 8.31 8.06 9.33
-----------------------------------------------
Net investment income .62 .60 .61 .67 1.30
Net realized and unrealized
gains (losses) (.17) (.22) .33 .29 (1.81)
-----------------------------------------------
Total from investment
operations .45 .38 .94 .96 (.51)
-----------------------------------------------
Dividends from net
investment income (.57) (.61) (.60) (.64) (.08)
In excess of net investment
income (.04) (.01) - - -
Tax return of capital - - - (.07) (.60)
Distributions from net
realized gains - - - - (.08)
-----------------------------------------------
Total distributions (.61) (.62) (.60) (.71) (.76)
-----------------------------------------------
Net asset value, end of year 8.25 8.41 8.65 8.31 8.06
-----------------------------------------------
Total return (%)1 5.57 4.31 11.80 12.65 (5.72)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 110,876 118,348 137,626 164,970 187,204
Ratios to average net
assets: (%)
Expenses .96 .90 .85 .96 .89
Net investment income 7.49 6.97 7.68 8.29 8.54
Portfolio turnover rate (%) 49.93 193.30 139.71 103.49 80.69
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 8.41 8.65 8.31 8.03
--------------------------------------
Net investment income .58 .55 .56 .31
Net realized and unrealized
gains (losses) (.17) (.22) .33 .30
--------------------------------------
Total from investment
operations .41 .33 .89 .61
--------------------------------------
Dividends from net
investment income (.52) (.56) (.55) (.30)
In excess of net investment
income (.04) (.01) - -
Tax return of capital - - - (.03)
--------------------------------------
Total distributions (.56) (.57) (.55) (.33)
--------------------------------------
Net asset value, end of year 8.26 8.41 8.65 8.31
--------------------------------------
Total return (%)1 5.12 3.74 11.19 7.09
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 5,710 4,473 3,700 1,193
Ratios to average net
assets: (%)
Expenses 1.49 1.46 1.40 1.54 2
Net investment income 6.96 6.43 7.17 7.41 2
Portfolio turnover rate (%) 49.93 193.30 139.71 103.49
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. For the period May 1, 1995 (effective date) to October 31, 1995 for Class C.
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide as high a level of current
income as is consistent with prudent investing while seeking preservation of
shareholder's capital.
PRINCIPAL INVESTMENTS The fund normally invests in U.S. government
securities, which include obligations either issued or guaranteed by the U.S.
government and its agencies or instrumentalities. Since its inception, the
fund has invested its assets solely in direct obligations of the U.S.
Treasury and in repurchase obligations collateralized by U.S. Treasury
obligations. The fund normally maintains the average dollar-weighted maturity
of its portfolio in a range of two to five years. Within this range, the
fund emphasizes an average dollar-weighted maturity of 3 1/2 years or less.
[Begin callout]
The fund invests in U.S. government obligations.
[End callout]
The fund may invest in zero-coupon bonds issued or guaranteed by the U.S.
government. Zero-coupon bonds are debt obligations that are issued at a
significant discount from face value. 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.
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.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
Generally, interest rates rise during times of inflation or a growing
economy, and will fall during an economic slowdown or recession. Securities
with longer maturities usually are more sensitive to interest rate changes
than securities with shorter maturities. Zero coupon bonds are also more
sensitive to interest rate changes than debt obligations that provide for
regular payments of interest.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
Because the fund only invests in U.S. Treasury obligations and repurchase
agreements, the level of income the fund may achieve may not be as high as
that of other funds that invest in lower-quality, longer-term securities.
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. The manager, of course, cannot audit
each issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.64% 9.65% 12.06% 6.64% 7.75% -2.15% 11.09% 3.99% 6.09% []%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Franklin Short-Intermediate U.S. xx% xx% xx%
Government Securities Fund -
Class A 2
Lehman Brothers Short U.S. xx% xx% xx%
Treasury 1-5 Year Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests
in U.S. government securities and Treasuries with maturities from one to five
years. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1
- -------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 2.25%
Paid at time of purchase 2.25%
Paid at redemption None 2
Exchange fee 3 None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1
- -------------------------------------------------------
Management fees 0.56%
Distribution and service
(12b-1) fees 4 0.09%
Other expenses 0.13%
---------------
Total annual fund operating expenses 0.78%
---------------
1. Before January 1, 1999, Class A shares were designated Class I.
2. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
3. There is a $5 fee for each exchange by a market timer (see page [#]).
4. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $303 1 $469 $649 $1,169
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.
The team responsible for the fund's management is:
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1987. He joined the Franklin
Templeton Group in 1984.
DAVID CAPURRO, VICE PRESIDENT OF ADVISERS
Mr. Capurro has been a manager of the fund since 1987. He joined the Franklin
Templeton Group in 1985.
TOM RUNKEL, VICE PRESIDENT OF ADVISERS
Mr. Capurro has been a manager of the fund since 1987. He joined the Franklin
Templeton Group in 1985.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund
paid 0.56% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily
from its net investment income and pays them monthly on or about the last day
of the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there
is no guarantee the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain
from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.29 10.28 10.35 10.03 10.80
------------------------------------------------
Net investment income .54 .57 .58 .56 .49
Net realized and unrealized
gains (losses) .19 .02 (.08) .31 (.70)
------------------------------------------------
Total from investment
operations .73 .59 .50 .87 (.21)
------------------------------------------------
Dividends from net
investment income (.56) (.58) (.57) (.55) (.47)
Distributions from net
realized gains - - - - (.09)
------------------------------------------------
Total distributions (.56) (.58) (.57) (.55) (.56)
------------------------------------------------
Net asset value, end of year 10.46 10.29 10.28 10.35 10.03
------------------------------------------------
Total return (%)1 7.38 5.88 4.97 8.90 (1.99)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 224,132 192,051 196,042 208,057 225,352
Ratios to average net
assets: (%)
Expenses .78 .78 .74 .73 .65
Expenses excluding waiver
and payments by affiliate - - - - .68
Net investment income 5.24 5.51 5.64 5.42 4.75
Portfolio turnover rate (%) 37.70 40.56 72.62 56.34 99.09
1. Total return does not include sales charges, and is not annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 5.75% charge charge of 1%
(Convertible Fund
and Equity Fund),
4.25% (Global Fund),
2.25% (Short-
Intermediate Fund)
or less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% or charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six within 18 months
within 12 months years
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. THE EQUITY FUND BEGAN OFFERING CLASS B
SHARES ON JANUARY 1, 1999.
SALES CHARGES - CONVERTIBLE FUND AND EQUITY FUND - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
SALES CHARGES - GLOBAL FUND - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
SALES CHARGES - SHORT-INTERMEDIATE FUND
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 2.25 2.30
$100,000 but under $250,000 1.75 1.78
$250,000 but under $500,000 1.25 1.26
$500,000 but under $1 million 1.00 1.01
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Convertible Fund and
Equity Fund to pay distribution fees of up to 0.25% per year, the Global Fund
to pay distribution fees of up to 0.15% per year, and the Short-Intermediate
Fund to pay distribution fees of up to 0.10% per year to those who sell and
distribute Class A shares and provide other services to shareholders. Because
these fees are paid out of Class A's assets on an on-going basis, over time
these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
SALES CHARGES - EQUITY FUND - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page [#]). After 8 years, your Class B shares automatically convert to Class
A shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We invest any investment of $250,000 or more in
Class A shares, since a reduced initial sales charge is available and Class
A's annual expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Equity Fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Convertible Fund and
the Equity Fund to pay distribution and other fees of up to 1% and the Global
Fund to pay distribution and other fees of up to 0.65% per year for the sale
of Class C shares and for services provided to shareholders. Because these
fees are paid out of Class C's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class A shares may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund,
if you are a qualified investor. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a
new CDSC will apply.
WAIVERS FOR CERTAIN INVESTORS Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions,
including:
o certain trust companies and bank trust departments investing $1 million
or more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton
or of certain dealers
o Chilean retirement plans that meet the requirements for retirement plans
described below.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC for each class generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly,
3% quarterly, 6% semiannually or 12% annually depending on the frequency
of your plan
o for redemptions by Franklin Templeton Trust Company employee benefit
plans or employee benefit plans serviced by ValuSelect(R) (not applicable to
Class B)
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy (for Class B, this applies to all
retirement plan accounts, not only IRAs)
o to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
RETIREMENT PLANS Certain retirement plans may buy Class A shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify
under our group investment program to buy Class A shares without an initial
sales charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or
Roth IRAs $250 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers, trustees
and directors of Franklin Templeton
entities, and their immediate family
members $100 $50
- --------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will invest your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Make your check payable to Make your check payable to
envelope] the fund in which you are the fund in which you are
investing. investing. Include your
BY MAIL account number on the check.
Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Mail your signed application To make a same day wire
to Investor Services. Please investment, please call us
BY WIRE include the wire control by 1:00 p.m. pacific time
number or your new account and make sure your wire
1-800/632-2301 number on the application. arrives by 3:00 p.m.
(or 1-650/312-2000
collect) To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A shares of the
Convertible Fund or the Equity Fund without any sales charge. Advisor Class
shareholders who exchange their shares for Convertible Fund or Equity Fund
Class A shares and later decide they would like to exchange into another fund
that offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. If you own both Class A and B shares of
the Equity Fund, also specify the class of
shares, otherwise we will sell your Class A
shares first. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
BY WIRE have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated
by dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise made large or frequent exchanges. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CONVERTIBLE FUND (CLASS A AND CLASS C ONLY) AND EQUITY FUND
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) --- 4.00 2.00
Investment under $50,000 5.00 --- ---
$50,000 but under $100,000 3.75 --- ---
$100,000 but under $250,000 2.80 --- ---
$250,000 but under $500,000 2.00 --- ---
$500,000 but under $1 million 1.60 --- ---
$1 million or more up to 1.00 1 --- ---
12B-1 FEE TO DEALER 0.25 0.25 2 1.00 3
GLOBAL FUND
CLASS A CLASS C
- ---------------------------------------------------------------
COMMISSION (%) --- 2.00
Investment under $100,000 4.00 ---
$100,000 but under $250,000 3.25 ---
$250,000 but under $500,000 2.25 ---
$500,000 but under $1 million 1.85 ---
$1 million or more up to 0.75 1 ---
12B-1 FEE TO DEALER 0.15 0.65 3
SHORT-INTERMEDIATE FUND
CLASS A
- ---------------------------------------------------------
COMMISSION (%) ---
Investment under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.00
$500,000 but under $1 million 0.85
$1 million or more up to 0.75 1
12B-1 FEE TO DEALER 0.10
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and up to 0.25% on Class A NAV purchases by certain
trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% for the Convertible Fund
and the Equity Fund and 0.15% for the Global Fund during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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 Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-4986 FIST1 P 03/99
Prospectus
FRANKLIN INVESTORS SECURITIES TRUST
ADVISOR CLASS
INVESTMENT STRATEGY Franklin Global Government
GLOBAL INCOME Income Fund
INVESTMENT STRATEGY Franklin Short-Intermediate
INCOME U.S. Government Securities Fund
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Franklin Global Government Income Fund
[insert page #] Franklin Short-Intermediate U.S. Government
Securities Fund
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide high current income, consistent
with preservation of capital, with capital appreciation as a secondary
consideration.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its total assets
in government securities at least 3 different countries, including the United
States. Government securities include securities issued or guaranteed by
domestic and foreign governments and their political subdivisions. In addition
to government securities, the fund also invests in other fixed-income
securities, such as bonds, notes, and debentures.
[Begin callout]
The fund invests primarily in U.S. and foreign government debt obligations.
[End callout]
The fund normally invests its assets principally within Australia, Canada,
Japan, New Zealand, the U.S., and Western Europe. The fund also invests in debt
securities of supranational entities, and in semi-governmental securities, which
are securities that are not backed by the full faith and credit and general
taxing powers of the government, or that have only its implied backing. The fund
may invest up to 30% of its net assets in securities of less developed and
developing countries.
The securities the fund buys may be denominated in any currency, or in
multinational currency units, and the fund may hold foreign currency. The fund
also uses forward currency exchange contracts to seek to protect or enhance
income or to protect capital. A forward currency exchange contract is an
obligation to buy or sell a specific currency for an agreed price at a future
date.
The fund may invest up to 35% of total assets in debt securities that are below
investment grade. Investment grade securities are rated in the top four ratings
categories by independent rating organizations such as Standard & Poor's
Corporation (S&P) and Moody's Investors Service, Inc. (Moody's). The fund
generally invests in securities rated at least B by Moody's or S&P or unrated
securities the fund's manager determines are comparable. Generally, lower rated
securities pay higher yields than more highly rated securities to compensate
investors for the higher risk.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal,
because it may not invest or may invest less in U.S. and foreign government
securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, fixed-income security prices fall. The
opposite is also true: fixed-income security prices rise when interest rates
fall. Generally, interest rates rise during times of inflation or a growing
economy, and will fall during an economic slowdown or recession. Securities with
longer maturities usually are more sensitive to interest rate changes than
securities with shorter maturities.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of all the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect its value and, thus, impact the value of
fund shares.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more risk than higher-rated securities. The principal risks of
investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Issuers of high yield debt securities are not as
strong financially as those with higher credit ratings. These issuers are
more likely to encounter financial difficulties and are more vulnerable to
changes in the economy, such as a recession or a sustained period of rising
interest rates, that could prevent them from making interest and principal
payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its entire
investment.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to changes in
the ratings assigned by ratings organizations. In addition, the entire high
yield securities market can experience sudden and sharp price swings due to
changes in economic conditions, stock market activity, large sustained sales
by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
that trade in that country. These movements will affect the fund's share price.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes. The fund's investments in
developing or emerging markets are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
legal, business and social frameworks to support securities markets. While
short-term volatility in these markets can be disconcerting, declines of 40% to
50% are not unusual.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each issuer and its major suppliers to verify their Year
2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
[Insert bar graph]
5.60% 7.59% 14.23% -0.25% 18.63% -7.76% 18.07% 10.76% 3.03% []%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Franklin Global Government Income Fund - xx% xx% xx%
Advisor Class 1
JP Morgan Global Government Bond Total xx% xx% xx%
Return Index 2
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
2. The unmanaged JP Morgan Global Government Bond Total Return Index includes
only actively traded fixed-rate bonds with a remaining maturity of one year or
longer. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Management fees 0.60%
Distribution and service (12b-1) fees None
Other expenses 0.25%
--------
Total annual fund operating expenses 0.85%
--------
1. There is a $5 fee for each exchange by a market timer (see page [#]).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$87 $271 $471 $1,049
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $216 billion in assets.
The team responsible for the fund's management is:
THOMAS J. DICKSON, VICE PRESIDENT OF TEMPLETON INVESTMENT COUNSEL, INC.
Mr. Dickson has been a manager of the fund since 1993. He joined the Franklin
Templeton Group in 1994.
NEIL S. DEVLIN CFA, PORTFOLIO MANAGER OF TEMPLETON INVESTMENT COUNSEL, INC.
Mr. Devlin has been a manager of the fund since 1994. He joined the Franklin
Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund paid
0.60% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS The fund intends to pay a dividend at least monthly
representing its net investment income. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there is
no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that if
you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax advisor about federal, state, local or foreign tax consequences
of your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
- ---------------------------------------------------
1998 4 1997 3
- ---------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 8.41 8.71
-------------------
Net investment income .63 .49
Net realized and unrealized
gains (losses) (.16) (.28)
-------------------
Total from investment
operations .47 .21
Less distributions from net
investment income (.58) (.49)
Less distributions in excess
of net investment income
(.04) (.02)
-------------------
-------------------
Total distributions (.62) (.51)
-------------------
-------------------
Net asset value, end of year 8.26 8.41
-------------------
Total return (%)1 5.81 2.49
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 829 741
Ratios to average net assets:
(%)
Expenses .85 .82 2
Net investment income 7.62 7.08 2
Portfolio turnover rate (%) 49.93 193.30
1. Total return is not annualized.
2. Annualized.
3. For the period January 2, 1997 (effective date) to October 31, 1997.
4. Based on average weighted shares outstanding.
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide as high a level of current income
as is consistent with prudent investing while seeking preservation of
shareholder's capital.
PRINCIPAL INVESTMENTS The fund normally invests in U.S. government securities,
which include obligations either issued or guaranteed by the U.S. government and
its agencies or instrumentalities. Since its inception, the fund has invested
its assets solely in direct obligations of the U.S. Treasury and in repurchase
obligations collateralized by U.S. Treasury obligations. The fund normally
maintains the average dollar-weighted maturity of its portfolio in a range of
two to five years. Within this range, the fund emphasizes an average
dollar-weighted maturity of 3 1/2 years or less.
[Begin callout]
The fund invests in U.S. government obligations.
[End callout]
The fund may invest in zero-coupon bonds issued or guaranteed by the U.S.
government. Zero-coupon bonds are debt obligations that are issued at a
significant discount from face value. 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.
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.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices go up when interest rates fall. Generally,
interest rates rise during times of inflation or a growing economy, and will
fall during an economic slowdown or recession. Securities with longer maturities
usually are more sensitive to interest rate changes than securities with shorter
maturities. Zero coupon bonds are also more sensitive to interest rate changes
than debt obligations that provide for regular payments of interest.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall. Because
the fund only invests in U.S. Treasury obligations and repurchase agreements,
the level of income the fund may achieve may not be as high as that of other
funds that invest in lower-quality, longer-term securities.
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. The manager, of course, cannot audit each
issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.64% 9.65% 12.06% 6.64% 7.75% -2.15% 11.09% 3.99% 6.24% []%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Franklin Short-Intermediate U.S. xx% xx% xx%
Government Securities Fund - Advisor
Class 1
Lehman Brothers Short U.S. Treasury 1-5 xx% xx% xx%
Year Index 2
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
2. The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index invests in
U.S. government securities and Treasuries with maturities from one to five
years. It includes reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Management fees 0.56%
Distribution and service (12b-1) fees None
Other expenses 0.13%
-----------
Total annual fund operating expenses 0.69%
-----------
1. There is a $5 fee for each exchange by a market timer (see page [#]).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$70 $221 $384 $859
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $216 billion in assets.
The team responsible for the fund's management is:
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1987 and has been with the
Franklin Templeton Group since 1984.
DAVID CAPURRO, VICE PRESIDENT OF ADVISERS
Mr. Capurro has been a manager of the fund since 1987 and has been with the
Franklin Templeton Group since 1985.
TOM RUNKEL, VICE PRESIDENT OF ADVISERS
Mr. Capurro has been a manager of the fund since 1987 and has been with the
Franklin Templeton Group since 1985.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund paid
0.56% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily from
its net investment income and pays them monthly on or about the last day of the
month. Your account may begin to receive dividends on the day after we receive
your investment and will continue to receive dividends through the day we
receive a request to sell your shares. Capital gains, if any, may be distributed
annually. The amount of these distributions will vary and there is no guarantee
the fund will pay dividends. Please keep in mind that if you invest in the fund
shortly before the fund deducts a capital gain distribution from its net asset
value, you will receive some of your investment back in the form of a taxable
distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on how long you have held your
shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
- ---------------------------------------------------
1998 1997 3
- ---------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.30 10.24
-------------------
Net investment income .57 .47
Net realized and unrealized
gains .16 .07
-------------------
Total from investment
operations .73 .54
-------------------
Less distributions from net
investment income (.58) (.48)
-------------------
Net asset value, end of year 10.45 10.30
-------------------
Total return (%)1 7.38 5.45
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 3,644 385
Ratios to average net assets:
(%)
Expenses .69 .70 2
Net investment income 5.28 5.35 2
Portfolio turnover rate (%) 37.70 40.56
1. Total return is not annualized.
2. Annualized.
3. For the period January 2, 1997 (effective date) to October 31, 1997.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"]QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc.
(Distributors). Minimum investments: $1,000 initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating in
comprehensive fee programs. Minimum investments: $250,000 initial ($100,000
initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial ($50
for accounts with an automatic investment plan) and $50 additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class or
Class Z shares of any of the Franklin Templeton Funds and $50 additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section 401
of the Internal Revenue Code, including salary reduction plans qualified
under section 401(k) of the Internal Revenue Code, and that are sponsored by
an employer (i) with at least 10,000 employees, or (ii) with retirement plan
assets of $100 million or more. Minimum investments: No initial or additional
minimums.
o 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. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum, as
long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $50 additional. For
minimum investment purposes, the group's investments are added together. The
group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as
$1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds. There are certain other requirements and the group must have
a purpose other than buying fund shares without a sales charge.
Please note that Advisor Class shares of the fund are no longer available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may continue to
invest in the fund's Advisor Class shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
[Insert graphic Make your check payable to Make your check payable to
of envelope] the fund in which you are the fund in which you are
investing. investing. Include your
BY MAIL account number on the check.
Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your name,
the fund name, and your account
number.
Mail the check and deposit slip
or note to Investor Services.
- -------------------------------------------------------------------------------
[Insert graphic Call to receive a wire Call to receive a wire
of three control number and wire control number and wire
lightning bolts] instructions. instructions.
Mail your signed application To make a same day wire
to Investor Services. Please investment, please call us
BY WIRE include the wire control by 1:00 p.m. pacific time
number or your new account and make sure your wire
1-800/632-2301 number on the application. arrives by 3:00 p.m.
(or
1-650/312-2000 To make a same day wire
collect) investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic Call Shareholder Services at Call Shareholder Services at
of two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#] for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application. DISTRIBUTION OPTIONS You may reinvest distributions
you receive from the fund in an existing account in the same share class of the
fund or in Advisor Class or Class A shares of another Franklin Templeton Fund.
To reinvest your distributions in Advisor Class shares of another Franklin
Templeton Fund, you must qualify to buy that fund's Advisor Class shares. For
distributions reinvested in Class A shares of another Franklin Templeton Fund,
initial sales charges and contingent deferred sales charges (CDSCs) will not
apply if you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class. You also may exchange your Advisor Class shares for Class
A shares of a fund that does not currently offer an Advisor Class (without any
sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund,you also may
exchange your shares for Class A shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#]).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares if you otherwise qualify to buy the fund's
Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15 days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the dollar value or
number of shares you wish to sell. Be sure to include all
necessary signatures and any additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s) and address on the
account, or otherwise according to your written instructions.
- -------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on the
account. Written instructions, with a signature guarantee,
are required to send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of three proceeds of $1,000 or more wired to a bank or
lightning bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
have your bank account information on file. If
BY WIRE we do not have this information, you will need to send
written instructions with your bank's name and address, your
bank account number, the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below,
directions] or send signed written instructions. See the
policies above for selling shares by mail or
BY EXCHANGE phone.
If you hold share certificates, you will need to return them
to the fund before your exchange can be processed.
- -------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777
MARINERS ISLAND BLVD., P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). The NAV for Advisor Class is calculated by
dividing its net assets by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee accounts) because you sell some of your shares, we may mail you a
notice asking you to bring the account back up to its applicable minimum
investment amount. If you choose not to do so within 30 days, we may close your
account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise made large or frequent exchanges. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us at
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also
call us at one of the following numbers. For your protection and to help ensure
we provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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 Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file #811-4986
FIST PA 03/99
Prospectus
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
FRANKLIN BOND FUND
CLASS A
INVESTMENT STRATEGY Income
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Franklin Adjustable U.S. Government Securities Fund
[insert page #] Franklin Adjustable Rate Securities Fund
[insert page #] Franklin Bond Fund
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Sales Charges
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to seek a high level of current income,
consistent with lower volatility of principal than a fund that invests in
fixed-rate securities.
PRINCIPAL INVESTMENTS. The fund will normally invest at least 65% of total
assets in adjustable rate mortgage securities ("ARMS") and other mortgage
securities, such as collateralized mortgage obligations ("CMOs"), with interest
rates that adjust periodically to reflect prevailing market interest rates. The
fund will only invest in mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
[Begin callout]
The fund will normally invest at least 65% of total assets in ARMS and other
adjustable rate mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
[End callout]
The fund may invest up to 35% of total assets in bonds and notes issued by 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, as well as in direct
obligations of the U.S. government, such as Treasury bonds, bills and notes, and
securities issued or guaranteed by U.S. government agencies. The fund may also
invest in repurchase agreements collateralized by U.S. government obligations
and in time and savings deposits (including certificates of deposit) of banks
and other institutions whose accounts are insured by the Federal Deposit
Insurance Corporation.
Government agency or instrumentality issues have different levels of credit
support. GNMA securities are supported by the full faith and credit of the U.S.
government; FNMA securities are supported by its right to borrow from the U.S.
Treasury under certain circumstances; and FHLMC securities are supported only by
the credit of that instrumentality. Investors should remember that guarantees of
timely repayment of principal and interest do not apply to the market prices and
yields of the securities or to the net asset value or performance of the fund,
which will vary with changes in interest rates and other market conditions.
Mortgage securities represent an ownership interest in mortgage loans made by
banks and other financial institutions to finance purchases of homes. The
individual loans are packaged or "pooled" together for sale to investors. As the
underlying mortgage loans are paid off, investors receive principal and interest
payments.
Interest rates on adjustable rate securities generally are reset at intervals of
one year or less so that their rates gradually align themselves with market
interest rates. These periodic adjustments help keep the prices of these
securities relatively stable when compared with the prices of fixed rate
securities, which generally fall when interest rates rise. As a result, the fund
may participate in increases in interest rates resulting in higher current
yields, but with less fluctuation in net asset value than a fund invested in
comparable fixed rate securities. Adjustable rate securities, however,
frequently limit the maximum amount by which the loan rate may change up or
down. The fund, therefore, may not benefit from increases in interest rates if
interest rates exceed a security's maximum allowable periodic or lifetime
limits. During periods of falling interest rates, the interest rates on these
securities may reset downward, resulting in a lower yield for the fund.
The fund may buy securities on a "when-issued" or "delayed delivery" basis. This
means that the securities will be paid for and delivered to the fund at a future
date, generally in 30 to 45 days.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal,
because it will not invest or will invest less in ARMS and other adjustable rate
securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE RISK Because changes in interest rates on ARMS and other
adjustable rate securities lag behind changes in market rates, the net asset
value of the fund may decline during periods of rising interest rates until the
interest rates on these securities reset to market rates. You could lose money
if you sell your shares of the fund before these rates reset.
If market interest rates increase substantially and the fund's adjustable rate
securities are not able to reset to market interest rates during any one
adjustment period, the value of the fund's holdings and its net asset value may
decline until the rates are able to reset to market rates. In the event of a
dramatic increase in interest rates, the lifetime limit on a security's interest
rate may prevent the rate from adjusting to prevailing market rates and the
market value of the security could decline substantially and affect the fund's
net asset value.
To the extent the fund invests in fixed income debt securities, it will be
subject to additional interest rate risks. When interest rates rise, fixed
income debt security prices fall. The opposite is also true: fixed income debt
security prices rise when interest rates fall. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an economic
slowdown or recession. Securities with longer maturities usually are more
sensitive to interest rate changes than securities with shorter maturities.
Because the interest rates on adjustable rate securities generally reset
downward when interest rates fall, their market value is unlikely to rise to the
same extent as the value of comparable fixed rate securities during periods of
declining interest rates.
[Begin callout]
If interest rates rise, the net asset value of the fund may fall until the
interest rates on the fund's adjustable rate securities reset to market rates.
If rates fall, mortgage holders may refinance their mortgage loans at lower
interest rates. This means you could lose money.
[End callout]
MORTGAGE SECURITIES RISK Mortgage securities differ from conventional debt
securities because principal is paid back over the life of the security rather
than at maturity. The fund may receive unscheduled prepayments of principal
prior to the security's maturity date due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. To the fund this means a loss
of anticipated interest, and a portion of its principal investment represented
by any premium the fund may have paid. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest rates.
INCOME RISK Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
DERIVATIVE SECURITIES RISK CMOs are considered derivative investments, one whose
value depends on (or is derived from) the value of an underlying asset. These
instruments are subject to credit risk and prepayment risk associated with the
underlying mortgage assets.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. The manager, of course, cannot audit each
issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
MASTER/FEEDER STRUCTURE The fund seeks to achieve its investment goal by
investing all of its assets in shares of the U.S. Government Adjustable Rate
Mortgage Portfolio ("Portfolio"). The Portfolio has the same investment goal and
substantially similar investment policies as the fund. The fund buys shares of
Mortgage Portfolio at net asset value. An investment in the fund is an indirect
investment in the Portfolio.
It is possible that the fund may have to withdraw its investment in the
Portfolio if the Portfolio changes its investment goal or if the fund's Board of
Trustees, at any time, considers it to be in the fund's best interest.
IF YOU ARE INVESTOR WHOSE INVESTMENT AUTHORITY IS RESTRICTED BY APPLICABLE LAW
OR REGULATION YOU SHOULD CONSULT YOUR LEGAL ADVISOR TO DETERMINE WHETHER AND TO
WHAT EXTENT SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR YOU. If you are
a municipal investor considering investment of proceeds of bond offerings into
the fund, you should consult with expert counsel to determine the effect, if
any, of various payments made by the fund, its manager or its principal
underwriter on arbitrage rebate calculations.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.34% 9.53% 8.67%% 4.01% 1.35% -1.96% 9.17% 6.25% 6.97% x.xx%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Adjustable U.S. Government x.xx% x.xx% x.xx%
Securities Fund 2
Lehman Bros. Short U.S. x.xx% x.xx% x.xx%
Government 1-2 Years Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains.
3. The unmanaged Lehman Brothers Short U.S. Treasury 1-2 Year Index invests in
U.S. Government securities and Treasuries with maturities from one to two years.
It includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- -------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 2.25%
Paid at time of purchase 2.25%
Paid at redemption None1
Exchange fee2 None
Please see "Sales Charges" on page [#] for an explanation of how and when these
sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- ------------------------------------------------
Management and administration fees3 0.50%
Distribution and service
(12b-1) fees4 0.25%
Other expenses 0.18%
--------
Total annual fund operating expenses3 0.93%
--------
1. Except for investments of $1 million or more (see page [#])and purchases by
certain retirement plans without an initial sales charge.
2. There is a $5 fee for each exchange by a market timer (see page [#]).
3. For the period shown, the manager had agreed in advance to limit its
management fees and to assume as its own expense certain expenses otherwise
payable by the fund and the Portfolio. With this reduction, management fees of
the Portfolio were 0.25%, administration fees of the fund were 0.10% and total
annual fund operating expenses were 0.76%. The manager may end this arrangement
at any time upon notice to the fund's Board of Trustees.
4. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
$318 1 $515 $728 $1,342
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the Portfolio's investment manager and the fund's administrator.
Together, Advisers and its affiliates manage over $216 billion and in assets.
The team responsible for the Portfolio's management is:
T. ANTHONY COFFEY, PORTFOLIO MANAGER OF ADVISERS
Mr. Coffey has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1989.
ROGER BAYSTON CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Bayston has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1998 and has more than 30
years experience in the securities industry.
For the fiscal year ended October 31, 1998, the fund's share of the Portfolio's
management fees, before any advance waiver, was 0.40% of the fund's average
daily net assets. Under an agreement by the manager to limit its fees, the fund
paid 0.25% of its average daily net assets as its share of the Portfolio's
management fees. The manager may end this arrangement at any time upon notice to
the fund's Board of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly, on or about the last day of the month, representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund will
pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that if
you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your shares of a fund for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult with your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, $9.48 $9.37 $9.34 $9.20 $9.77
beginning of year
------------------------------------------------
Net investment income .51 .55 .56 .54 .35
Net realized and unrealized (.12) .10 .03 .14 (.61)
Gains (losses)
------------------------------------------------
Total from investment .39 .65 .59 .68 (.26)
operations
------------------------------------------------
Dividends from net (.51) (.54) (.56) (.54) (.31)
investment income
------------------------------------------------
Total distributions
------------------------------------------------
Net asset value, end of year $9.36 $9.48 $9.37 $9.34 $9.20
------------------------------------------------
Total return (%) 1 4.26% 7.18% 6.54% 7.57% (2.65%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year $298,298 $334,990 $397,078 $509,371 $700,617
($ x 1,000)
Ratios to average net
assets: (%)
Expenses 2 .76% .75% .69% .61% .42%
Expenses excluding waiver .93% .93% .86% .86% .82%
and payments by affiliate 2
Net investment income 5.38% 5.81% 5.87% 5.76% 3.67%
1. Total return does not include sales charges, and is not annualized.
2. Includes the fund's share of the Portfolio's allocated expenses.
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to seek a high level of current income,
consistent with lower volatility of principal than a fund that invests in
fixed-rate securities.
PRINCIPAL INVESTMENTS. The fund will normally invest at least 65% of total
assets in mortgage securities and asset-backed securities with interest rates
that adjust periodically to reflect prevailing market interest rates. These
include adjustable rate mortgage securities ("ARMS") issued or guaranteed by
private institutions, such as banks, insurance companies, mortgage bankers or
others, or by the U.S. government, its agencies or instrumentalities. They also
include collateralized mortgage obligations ("CMOs"). The fund will only invest
in securities rated at least AA by Standard & Poor's Corporation ("S&P") or Aa
by Moody's Investors Service, Inc. ("Moody's"), or unrated securities the fund's
manager determines are comparable.
[Begin callout]
The fund will normally invest at least 65% of total assets in mortgage
securities and asset-backed securities with adjustable interest rates. The fund
will only invest in securities rated at least AA by S&P or Aa by Moody's, or
unrated securities the fund's manager determines are comparable.
[End callout]
The fund may invest up to 35% of total assets in other adjustable rate or fixed
rate securities. These include bonds and notes issued by 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, as well as direct obligations of the
U.S. government, such as Treasury bonds, bills and notes, and securities issued
or guaranteed by U.S. government agencies. The fund may also invest in
repurchase agreements collateralized by U.S. government obligations and in time
and savings deposits (including certificates of deposit) of banks and other
institutions whose accounts are insured by the Federal Deposit Insurance
Corporation.
Mortgage securities represent an ownership interest in mortgage loans made by
banks and other financial institutions to finance purchases of homes. The
individual loans are packaged or "pooled" together for sale to investors. As the
underlying mortgage loans are paid off, investors receive principal and interest
payments. Pools of mortgage loans created by private issuers generally offer a
higher rate of interest than government pools because there are no direct or
indirect government guarantees of payment, although timely payment of interest
and principal is often supported by various forms of insurance or guarantees.
The fund may buy privately issued mortgage securities without insurance or
guarantees.
Mortgage securities issued or backed by government agencies have different
levels of credit support. GNMA securities are supported by the full faith and
credit of the U.S. government; FNMA securities are supported by its right to
borrow from the U.S. Treasury under certain circumstances; and FHLMC securities
are supported only by the credit of that instrumentality. Investors should
remember that guarantees of timely repayment of principal and interest do not
apply to the market prices and yields of the securities or to the net asset
value or performance of the fund, which will vary with changes in interest rates
and other market conditions.
Interest rates on adjustable rate securities generally are reset at intervals of
one year or less so that their rates gradually align themselves with market
interest rates. These periodic adjustments help keep the prices of these
securities relatively stable when compared with the prices of fixed rate
securities, which generally fall when interest rates rise. As a result, the fund
may participate in increases in interest rates resulting in higher current
yields, but with less fluctuation in net asset value than a fund invested in
comparable fixed rate securities. Adjustable rate securities, however,
frequently limit the maximum amount by which the loan rate may change up or
down. The fund, therefore, may not benefit from increases in interest rates if
interest rates exceed a security's maximum allowable periodic or lifetime
limits. During periods of falling interest rates, the interest rates on these
securities may reset downward, resulting in a lower yield for the fund.
Asset-backed securities are securities backed by home equity and credit card
loans, automobile, mobile home and recreational vehicle loans and leases, and
other receivables.
The fund may buy securities on a "when-issued" or "delayed delivery" basis. This
means that the securities will be paid for and delivered to the fund at a future
date, generally in 30 to 45 days.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal,
because it will not invest or will invest less in ARMS and other adjustable rate
mortgage securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE RISK Because changes in interest rates on adjustable rate
securities lag behind changes in market interest rates, the net asset value of
the fund may decline during periods of rising interest rates until the interest
rates on these securities reset to market rates. You could lose money if you
sell your shares of the fund before these rates reset.
If market interest rates increase substantially and the fund's adjustable rate
securities are not able to reset to market interest rates during any one
adjustment period, the value of the fund's holdings and its net asset value may
decline until the rates are able to reset to market rates. In the event of a
dramatic increase in interest rates, the lifetime limit on a security's interest
rate may prevent the rate from adjusting to prevailing market rates and the
market value of the security could decline substantially and affect the fund's
net asset value.
To the extent the fund invests in fixed income debt securities, it will be
subject to additional interest rate risks. When interest rates rise, fixed
income debt security prices fall. The opposite is also true: fixed income debt
security prices rise when interest rates fall. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an economic
slowdown or recession. Securities with longer maturities usually are more
sensitive to interest rate changes than securities with shorter maturities.
Because loan rates on adjustable rate securities generally reset downward when
interest rates fall, their market value is unlikely to rise to the same extent
as the value of a comparable fixed rate security during periods of declining
interest rates.
[Begin callout]
If interest rates rise, the net asset value of the fund may fall until the
interest rates on the fund's adjustable rate securities reset to market rates.
If rates fall, borrowers may refinance their mortgages and other loans at lower
interest rates. This means you could lose money.
[End callout]
MORTGAGE SECURITIES RISK Mortgage securities differ from conventional debt
securities because principal is paid back over the life of the security rather
than at maturity. The fund may receive unscheduled prepayments of principal
prior to the security's maturity date due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. To the fund this means a loss
of anticipated interest, and a portion of its principal investment represented
by any premium the fund may have paid. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest rates.
CREDIT RISK This is the possibility that an issuer of a security or the borrower
on the underlying mortgage or debt obligation will be unable to make interest
payments or repay principal. While securities directly issued by the U.S.
Treasury and certain agencies that are backed by the full faith and credit of
the U.S. government present little credit risk, securities issued by other
agencies or by private issuers may have greater credit risks. Changes in an
issuer's financial strength or in a security's credit rating may affect its
value and, thus, impact the value of fund shares.
INCOME RISK Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
ASSET-BACKED SECURITIES RISK Issuers of asset-backed securities may have limited
ability to enforce the security interest in the underlying assets, and the
credit enhancements provided to support these securities, if any, may be
inadequate to protect investors in the event of a default. Like mortgage
securities, asset-backed securities are subject to prepayment risk.
DERIVATIVE SECURITIES RISK CMOs are considered derivative investments, one whose
value depends on (or is derived from) the value of an underlying asset. These
instruments are subject to credit risk and prepayment risk associated with the
underlying mortgage assets.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. The manager, of course, cannot audit each
issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
MASTER/FEEDER STRUCTURE The fund seeks to achieve its investment goal by
investing all of its assets in shares of the Adjustable Rate Securities
Portfolio ("Portfolio"). The Portfolio has the same investment goal and
substantially similar investment policies as the fund. The fund buys shares of
the Portfolio at net asset value. An investment in the fund is an indirect
investment in the Portfolio.
It is possible that the fund may have to withdraw its investment in the
Portfolio if the Portfolio changes its investment goal or if the fund's Board of
Trustees, at any time, considers it to be in the fund's best interest.
IF YOU ARE INVESTOR WHOSE INVESTMENT AUTHORITY IS RESTRICTED BY APPLICABLE LAW
OR REGULATION YOU SHOULD CONSULT YOUR LEGAL ADVISOR TO DETERMINE WHETHER AND TO
WHAT EXTENT SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR YOU. If you are
a municipal investor considering investment of proceeds of bond offerings into
the fund, you should consult with expert counsel to determine the effect, if
any, of various payments made by the fund, its manager or its principal
underwriter on arbitrage rebate calculations.
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 7 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Insert bar graph]
6.00% 4.88% 1.04% 8.47% 5.53% 6.88% x.xx%
92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q[] '[] []%
WORST QUARTER:
Q[] '[] []%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
1 YEAR 5 YEARS INCEPTION
12/26/91
- --------------------------------------------------------------------------
Adjustable Rate Securities Fund2 x.xx% x.xx% x.xx%
Lehman Bros. Short U.S. x.xx% x.xx% x.xx%
Government 1-2 Years Index 3
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains.
3. The unmanaged Lehman Brothers Short U.S. Treasury 1-2 Year Index invests in
U.S. Government securities and Treasuries with maturities from one to two years.
It includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- ----------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 2.25%
Paid at time of purchase 2.25%
Paid at redemption None 1
Exchange fee 2 None
Please see "Sales Charges" on page [#] for an explanation of how and when these
sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- --------------------------------------------------
Management fees and administration 0.50%
fees 3
Distribution and service
(12b-1) fees 4 0.25%
Other expenses 0.28%
----------
Total annual fund operating expenses 3
1.03%
----------
1. Except for investments of $1 million or more (see page [#])and purchases by
certain retirement plans without an initial sales charge.
2. There is a $5 fee for each exchange by a market timer (see page [#]).
3. For the period shown, the manager had agreed in advance to limit its
management fees. With this reduction, management fees of the Portfolio were
0.21%, administration fees of the fund were 0.10% and total annual fund
operating expenses were 0.84%. The manager may end this arrangement at any time
upon notice to the fund's Board of Trustees.
4. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$328 1 $545 $781 $1,456
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc.(Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the Portfolio's investment manager and the fund's adminstrator.
Together, Advisers and its affiliates manage over $216 billion in assets.
The team responsible for the Portfolio's management is:
T. ANTHONY COFFEY, PORTFOLIO MANAGER OF ADVISERS
Mr. Coffey has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1989.
ROGER BAYSTON CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Bayston has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1998 and has more than 30
years experience in the securities industry.
For the fiscal year ended October 31, 1998, the fund's share of the Portfolio's
management fees, before any advance waiver, was 0.40% of the fund's average
daily net assets. Under an agreement by the manager to limit its fees, the fund
paid 0.21% of its average daily net assets as its share of the Portfolio's
management fees. The manager may end this arrangement at any time upon notice to
the fund's Board of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily from
its net investment income and pays them monthly on or about the last day of the
month. Your account may begin to receive dividends on the day after we receive
your investment and will continue to receive dividends through the day we
receive a request to sell your shares. Capital gains, if any, may be distributed
annually. The amount of these distributions will vary and there is no guarantee
the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will receive
some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your shares of a fund for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult with your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, $9.96 $9.87 $9.82 $9.70 $10.04
Beginning of year
------------------------------------------------
Net investment income .54 .56 .54 .58 .45
Net realized and unrealized (.01) .09 .06 .12 (.34)
Gains (losses)
------------------------------------------------
Total from investment .53 .65 .60 .70 .11
operations
------------------------------------------------
Dividends from net (.54) (.56) (.55) (.58) (.45)
Investment income
------------------------------------------------
Net asset value, end of year $9.95 $9.96 $9.87 $9.82 $9.70
------------------------------------------------
Total return (%)1 5.47% 6.75% 6.23% 7.57% 1.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year $28,892 $21,137 $15,707 $17,014 $24,564
($ x 1,000)
Ratios to average net .84% .81% .90% .70% .45%
Assets: (%)
Expenses2
Expenses excluding waiver 1.03% 1.00% 1.12% .99% .85%
and payments by affiliate2
Net investment income 5.35% 5.64% 5.54% 5.82% 4.45%
1. Total return does not include sales charges, and is not annualized.
2. Includes the fund's share of the Portfolio's allocated expenses.
FRANKLIN BOND FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOALS The fund's principal investment goal is to provide a high level of current
income consistent with the preservation of capital. Its secondary goal is
capital appreciation over the long term.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its total assets
in investment grade fixed-income securities. The fund focuses on government and
corporate debt securities and mortgage-backed and asset-backed securities.
Mortgage-backed securities represent interests in "pools" of mortgage loans
issued by U.S. government agencies, foreign government agencies, and private
institutions. The payment of interest and principal on securities issued by U.S.
government agencies generally is guaranteed either by the full faith and credit
of the U.S. government or by the credit agency. The guarantee applies only to
the timely repayment of principal and interest and not to the market prices and
yields of the securities or to the net asset value or performance of the fund,
which will vary with changes in interest rates and other market conditions.
Asset-backed securities are securities backed by credit card receivables,
automobile, mobile home and recreational vehicle loans and leases, and other
receivables.
The fund may invest up to 25% of total assets in futures contracts on U.S.
Treasury securities. A futures contract is an agreement to buy or sell a
specific security or commodity at a specified future date and price. The fund
may purchase futures contracts possibly at a lower cost to the fund than a
direct investment in various fixed-income securities sectors. The fund may
invest up to 15% of assets in foreign securities.
[Begin Callout]
The fund invests primarily in investment grade fixed-income securities from
various market sectors that include government and corporate debt securities
and mortgage-backed and asset-backed securities.
[End Callout]
In choosing investments, the fund's manager selects securities in various market
sectors based on the manager's assessment of changing economic, market, industry
and issuer conditions. The manager use a "top-down" analysis of macroeconomic
trends, combined with a "bottom-up" fundamental analysis of market sectors,
industries and issuers to try to take advantage of varying sector reactions to
economic events. The manager evaluates business cycles, changes in yield curves
and apparent imbalances in values between and within markets.
The fund focuses on "investment grade" securities which are issues rated in the
top four rating categories by independent rating agencies such as Standard &
Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or, if
unrated, determined by the fund's manager to be comparable. The fund may invest
up to 35% of its total assets in non-investment grade fixed-income securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals, because it may not invest or may invest less in investment grade
fixed-income securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE RISK When interest rates rise, fixed-income security prices fall.
The opposite is also true: fixed-income security prices rise when interest rates
fall. Generally, interest rates rise during times of inflation or a growing
economy, and will fall during an economic slowdown or recession. Securities with
longer maturities usually are more sensitive to interest rate changes than
securities with shorter maturities.
INCOME RISK Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
[Begin Callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of all the fund's debt securities will fall and so too
will the fund's share price. This means you could lose money.
[End Callout]
- ------------------------------------------------------------------------------
Mutual fund shares 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. Although the fund tries to maintain a $1 share price, it is possible
to lose money by investing in the fund.
- ------------------------------------------------------------------------------
Mutual fund shares 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. Although the fund tries to maintain a $1 share price, it is possible
to lose money by investing in the fund.
CREDIT RISK This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect its value and, thus, impact the
value of fund shares.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK Mortgage securities differ from
conventional debt securities because principal is paid back over the life of the
security rather than at maturity. The fund may receive unscheduled prepayments
of principal prior to the security's maturity date due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage loans. To the fund this
means a loss of anticipated interest, and a portion of its principal investment
represented by any premium the fund may have paid. Mortgage prepayments
generally increase with falling interest rates and decrease with rising interest
rates.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets and credit enhancements provided to
support these securities, if any, may be inadequate to protect investors in the
event of a default. Like mortgage-backed securities, asset-backed securities are
subject to prepayment risk.
DERIVATIVE SECURITIES RISK Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments or
indices. Futures contracts are considered derivative investments. The fund's
investment in derivatives may involve a small investment relative to the amount
of risk assumed. Some derivatives may be particularly sensitive to changes in
interest rates.
FOREIGN SECURITIES RISK Securities of governments and companies located outside
the U.S. may offer significant opportunities for gain, but they also involve
additional risks that can increase the potential for losses in the fund.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY RISK Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may not be required to make the same level of
disclosure about Year 2000 readiness as is required in the U.S. The manager, of
course, cannot audit each company and its major suppliers to verify their Year
2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1
- ----------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25%
Paid at time of purchase 4.25%
Paid at redemption None 2
Exchange fee 3 None
Please see "Sales Charges" on page [#] for an explanation of how and when these
sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1, 4
- ----------------------------------------------------
Management fees5 0.43%
Distribution and service
(12b-1) fees6 0.25%
Other expenses 0.61%
------------
Total annual fund operating expenses5
1.29%
------------
1. Before January 1, 1999, Class A shares were designated Class I.
2. Except for investments of $1 million or more (see page [#])and purchases by
certain retirement plans without an initial sales charge.
3. There is a $5 fee for each exchange by a market timer (see page [#]).
4. The fund began offering Class A shares on August 3, 1998. Total annual fund
operating expenses are annualized.
5. For the period shown, the manager and administrator had agreed in advance to
waive their respective fees and to assume as their own expense certain expenses
otherwise payable by the fund. With this reduction, management fees were 0% and
total annual fund operating expenses were 0.25%. After October 31, 1999, the
manager and administrator may end this arrangement at any time.
6. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $551 1 $817 $1,102 $1,915
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Templeton Adivers, Inc. (Advisers), 777 Mariners Island Blvd., San
Mateo, CA 94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.
The team responsible for the fund's management is:
ROGER BAYSTON CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Bayston has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1998 and has more than 30
years experience in the securities industry.
THOMAS J. DICKSON, PORTFOLIO MANAGER OF FRANKLIN TEMPLETON INVESTMENT
COUNSEL, INC.
Mr. Dickson has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1994.
For the fiscal year ended October 31, 1998, management fees, before any advance
waiver, were 0.43% of the fund's average daily net assets. Under an agreement by
the manager to waive its fees, the fund did not pay any management fees. After
October 31, 1999, the manager may end this arrangement at any time upon notice
to the fund's Board of Trustees.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.425% of the value of net assets up to and including $500 million; and
o 0.325% of the value of net assets over $500 million and not over $1
billion; and
o 0.280% of the value of net assets over $1 billion and not over $1.5
billion; and
o 0.235% of the value of net assets over $1.5 billion and not over $6.5
billion; and
o 0.215% of the value of net assets over $6.5 billion and not over $11.5
billion; and
o 0.200% of the value of net assets over $11.5 billion and not over $16.5
billion; and
o 0.190% of the value of net assets over $16.5 billion and not over $19
billion; and
o 0.180% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.170% of the value of net assets in excess of $21.5 billion.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily from
its net investment income and pays them monthly on or about the last day of the
month. Your account may begin to receive dividends on the day after we receive
your investment and will continue to receive dividends through the day we
receive a request to sell your shares. Capital gains, if any, may be distributed
annually. The amount of these distributions will vary and there is no guarantee
the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will receive
some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital gains
no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your shares of a fund for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have held
your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult with your
tax adviser about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception. This
information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31
1998 3
- -----------------------------------------
PER SHARE DATA ($)
Net asset value, $10.00
beginning of year
---------
Net investment income .12
Net realized and unrealized .30
gains
---------
Total from investment .42
operations
---------
Distributions from net (.05)
realized gains
---------
Net asset value, end of year $10.37
---------
Total return (%)1 4.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year $4,232
($ x 1,000)
Ratios to average net
Assets: (%)
Expenses2 .50%
Expenses excluding waiver 1.29%
and payments by affiliate2
Net investment income2 5.21%
Portfolio turnover rate (%) 23.19%
1. Total return does not include sales charges, and is not annualized.
2. Annualized
3. For the period August 3, 1998 (effective date) to October 31, 1998. Based
on average weighted shares outstanding.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES - ADJUSTABLE U.S.
GOVERNMENT SECURITIES FUND AND ADJUSTABLE RATE SECURITIES FUND:
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 2.25 2.30
$100,000 but under $250,000 1.75 1.78
$250,000 but under $500,000 1.25 1.26
$500,000 but under $1 million 1.00 1.01
[Insert graphic of percentage sign] SALES CHARGES - BOND FUND - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Franklin Bond Fund - Class A or Adjustable
U.S. Government Securities Fund and Adjustable Rate Securities Fund shares
without an initial sales charge. However, there is a 1% contingent deferred
sales charge (CDSC) on any shares you sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page [#]
for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The funds have a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay distribution
fees of up to 0.25% per year to those who sell and distribute the Class A or
fund's shares and provide other services to shareholders. Because these fees are
paid out of the Class A's or the fund's assets on an on-going basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A or fund shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE
APPROPRIATE SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
Certain Franklin Templeton Funds offer multiple share classes not offered by
Adjustable U.S. Government Securities Fund and Adjustable Rate Securities Fund.
For purposes of this privilege, these funds' shares are considered Class A
shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Shares of the fund may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment trust
sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust shares
held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund, if
you are a qualified investor. If you paid a CDSC when you sold your shares,
we will credit your account with the amount of the CDSC paid but a new CDSC
will apply.
WAIVERS FOR CERTAIN INVESTORS Shares of the fund also may be purchased without
an initial sales charge or CDSC by various individuals and institutions,
including:
o certain trust companies and bank trust departments investing $1 million or
more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans employees and
o other associated persons or entities of Franklin Templeton
or of certain dealers
o Chilean retirement plans that meet the requirements for retirement plans
described below.
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER, CALL YOUR
INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually depending on the frequency of your
plan
o for redemptions by Franklin Templeton Trust Company employee benefit
plans or employee benefit plans serviced by ValuSelect(R)
o for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy
o to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
RETIREMENT PLANS Certain retirement plans may buy shares of the fund without an
initial sales charge. To qualify, the plan must be sponsored by an employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or that agrees to invest
o at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify under
our group investment program to buy shares without an initial sales charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
Franklin Adjustable Rate Securities Fund is closed to new investors. If you were
a shareholder of record as of December 15, 1998, you may continue to add to your
account, subject to your appliable minimum investment amount, or buy additional
shares through reinvestment of dividend or capital gain distributions.
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
UGMA/UTMA accounts $100 $50
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
Broker-dealer sponsored wrap account
programs $250 $50
Full-time employees, officers, trustees and directors of Franklin Templeton
entities, and their immediate family members
$100 $50
- --------------------------------------------------------------------------
Certain Franklin Templeton Funds offer multiple share classes not offered by
Adjustable U.S. Government Securities Fund and Adjustable Rate Securities Fund.
Please note that for selling or exchanging your shares, or for other purposes,
these funds' shares are considered Class A shares. Before January 1, 1999, the
fund's shares were considered Class I shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of the fund. the fund. Include your
envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and your
account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Mail your signed application To make a same day wire
to Investor Services. Please investment, please call us
BY WIRE include the wire control by 1:00 p.m. pacific time
number or your new account and make sure your wire
1-800/632-2301 number on the application. arrives by 3:00 p.m.
(or 1-650/312-2000
collect) To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in shares of
the Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund by
transferring money from your paycheck to the fund by electronic funds transfer.
If you are interested, indicate on your application that you would like to
receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same class of fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into the fund without any sales charge. Advisor Class shareholders of another
Franklin Templeton Fund also may exchange into the Adjustable U.S. Government
Securities Fund and Adjustable Rate Securities Fund without any sales charge.
Advisor Class shareholders who exchange their shares for shares of these funds
and later decide they would like to exchange into another fund that offers
Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15 days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. Be sure to
include all necessary signatures and any additional
documents, as well as signature guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your shares
by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
BY WIRE have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX
7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Class A's NAV is calculated by dividing its
net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the Bond Fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your shares
may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise made large or frequent exchanges. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AND
ADJUSTABLE RATE SECURITIES FUND
- ---------------------------------------------------------
COMMISSION (%) ---
Investment under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.00
$500,000 but under $1 million 0.85
$1 million or more up to 0.75 1
12B-1 FEE TO DEALER 0.25%
BOND FUND CLASS A
- ---------------------------------------------------------
COMMISSION (%) ---
Investment under $100,000 4.00
$100,000 but under $250,000 3.25
$250,000 but under $500,000 2.25
$500,000 but under $1 million 1.85
$1 million or more up to 0.75 1
12B-1 FEE TO DEALER 0.25
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans1 and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us at
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also
call us at one of the following numbers. For your protection and to help ensure
we provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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 Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file #[] FIST2 P 03/99
Prospectus
Franklin Bond Fund
ADVISOR CLASS
INVESTMENT STRATEGY Income
MARCH 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goals and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is to provide a high level of
current income consistent with the preservation of capital. Its secondary
goal is capital appreciation over the long term.
PRINCIPAL INVESTMENTS The fund normally invests at least 65% of its total
assets in investment grade fixed-income securities. The fund focuses on
government and corporate debt securities and mortgage-backed and asset-backed
securities. Mortgage-backed securities represent interests in "pools" of
mortgage loans issued by U.S. government agencies, foreign government
agencies, and private institutions. The payment of interest and principal on
securities issued by U.S. government agencies generally is guaranteed either
by the full faith and credit of the U.S. government or by the credit agency.
The guarantee applies only to the timely repayment of principal and interest
and not to the market prices and yields of the securities or to the net asset
value or performance of the fund, which will vary with changes in interest
rates and other market conditions. Asset-backed securities are securities
backed by credit card receivables, automobile, mobile home and recreational
vehicle loans and leases, and other receivables.
The fund may invest up to 25% of total assets in futures contracts on U.S.
Treasury securities. A futures contract is an agreement to buy or sell a
specific security or commodity at a specified future date and price. The fund
may purchase futures contracts possibly at a lower cost to the fund than a
direct investment in various fixed-income securities sectors. The fund may
invest up to 15% of assets in foreign securities.
[Begin Callout]
The fund invests primarily in investment grade fixed-income securities from
various market sectors that include government and corporate debt securities
and mortgage-backed and asset-backed securities.
[End Callout]
In choosing investments, the fund's manager select securities in various
market sectors based on the manager's assessment of changing economic,
market, industry and issuer conditions. The manager use a "top-down" analysis
of macroeconomic trends, combined with a "bottom-up" fundamental analysis of
macroeconomic trends, combined with a "bottom-up" fundamental analysis of
market sectors, industries and issuers to try to take advantage of varying
sector reactions to economic events. The manager evaluate business cycles,
changes in yield curves and apparent imbalances in values between and within
markets.
The fund focuses on "investment grade" securities which are issues rated in
the top four rating categories by independent rating agencies such as
Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc.
(Moody's) or, if unrated, determined by the fund's manager to be comparable.
The fund may invest up to 35% of its total assets in non-investment grade
fixed-income securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals, because it may not invest or may invest less in investment grade
fixed-income securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE RISK When interest rates rise, fixed-income security prices
fall. The opposite is also true: fixed-income security prices rise when
interest rates fall. Generally, interest rates rise during times of inflation
or a growing economy, and will fall during an economic slowdown or recession.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
INCOME RISK Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
[Begin Callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of all the fund's debt securities will fall and so too
will the fund's share price. This means you could lose money.
[End Callout]
- ------------------------------------------------------------------------------
Mutual fund shares 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. Although the fund tries to maintain a $1 share price, it is
possible to lose money by investing in the fund.
- ------------------------------------------------------------------------------
CREDIT RISK This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK Mortgage securities differ
from conventional debt securities because principal is paid back over the
life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal prior to the security's maturity date
due to voluntary prepayments, refinancing or foreclosure on the underlying
mortgage loans. To the fund this means a loss of anticipated interest, and a
portion of its principal investment represented by any premium the fund may
have paid. Mortgage prepayments generally increase with falling interest
rates and decrease with rising interest rates.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets and credit enhancements provided
to support these securities, if any, may be inadequate to protect investors
in the event of a default. Like mortgage-backed securities, asset-backed
securities are subject to prepayment risk.
DERIVATIVE SECURITIES RISK Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices. Futures contracts are considered derivative investments. The
fund's investment in derivatives may involve a small investment relative to
the amount of risk assumed. Some derivatives may be particularly sensitive to
changes in interest rates.
FOREIGN SECURITIES RISK Securities of governments and companies located
outside the U.S. may offer significant opportunities for gain, but they also
involve additional risks that can increase the potential for losses in the
fund.
COUNTRY RISK. General securities market movements in any country where the
fund has investments are likely to affect the value of the securities the
fund owns which trade in that country. These movements will affect the fund's
share price.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets and punitive taxes.
COMPANY RISK. Foreign companies are not subject to the same accounting,
auditing and financial reporting standards and practices as U.S. companies
and their stocks may not be as liquid as stocks of similar U.S. companies.
Foreign stock exchanges, brokers and companies generally have less government
supervision and regulation than in the U.S. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in
foreign courts than with respect to U.S. companies in U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see page [#] for more information.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's annualized expenses for
the fiscal year ended October 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)2
ADVISOR CLASS
- -------------------------------------------------------------------------------
Management fees 3 0.43%
Distribution and service (12b-1) fees None
Other expenses 0.61%
---------------------------
Total annual fund operating expenses3 1.04%
---------------------------
1. There is a $5 fee for each exchange by a market timer (see page [#]).
2. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated.
3. For the period shown, the manager and administrator had agreed in advance
to waive their respective fees and to assume as their own expense certain
expenses otherwise payable by the fund. With this reduction, management fees
were 0% and total annual fund operating expenses were 0.25%. After October
31, 1999, the manager and administrator may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$106 $331 $574 $1,271
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $216 billion in assets.
The team responsible for the fund's management is:
ROGER BAYSTON CFA, PORTFOLIO MANAGER OF ADVISERS
Mr. Bayston has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1998 and has more than 30
years experience in the securities industry.
THOMAS J. DICKSON, PORTFOLIO MANAGER OF FRANKLIN TEMPLETON INVESTMENT
COUNSEL, INC.
Mr. Dickson has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1994.
For the fiscal year ended October 31, 1998, management fees, before any
advance waiver, were 0.43% of the fund's average daily net assets. Under an
agreement by the manager to waive its fees, the fund did not pay any
management fees. After October 31, 1999, the manager may end this arrangement
at any time upon notice to the fund's Board of Trustees.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.425% of the value of net assets up to and including $500 million; and
o 0.325% of the value of net assets over $500 million and not over $1
billion; and
o 0.280% of the value of net assets over $1 billion and not over $1.5
billion; and
o 0.235% of the value of net assets over $1.5 billion and not over $6.5
billion; and
o 0.215% of the value of net assets over $6.5 billion and not over $11.5
billion; and
o 0.200% of the value of net assets over $11.5 billion and not over $16.5
billion; and
o 0.190% of the value of net assets over $16.5 billion and not over $19
billion; and
o 0.180% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.170% of the value of net assets in excess of $21.5 billion.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily
from its net investment income and pays them monthly on or about the last day
of the month. Your account may begin to receive dividends on the day after we
receive your investment and will continue to receive dividends through the
day we receive a request to sell your shares. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there
is no guarantee the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gain distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of the fund or receive them in cash.
Any capital gains the fund distributes are taxable to you as long-term
capital gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about federal, state, local or foreign tax consequences of your
investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
- ---------------------------------------------------------
1998 3
- ---------------------------------------------------------
PER SHARE DATA ($)
Net asset value, 10.00
beginning of year
-------------------------
Net investment income .12
Net realized and unrealized .31
gains
-------------------------
Total from investment .43
operations
-------------------------
Less distributions from net (.05)
investment income
-------------------------
Net asset value, end of year 10.38
-------------------------
Total return (%)1 4.27
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 31,588
1,000)
Ratios to average net assets:
(%)
Expenses2 .25
Expenses excluding waiver 1.04
and payments by affiliate2
Net investment income2 5.46
Portfolio turnover rate (%) 23.19
1. Total return is not annualized.
2. Annualized.
3. For the period August 3,1998 (effective date) to October 31. 1998. Based
on average weighted shares outstanding.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"]QUALIFIED INVESTORS
The following investors may qualify to buy [Advisor Class] [Class Z] shares
of the fund.
o Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc.
(Distributors). Minimum investments: $1,000 initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial and ($50 for accounts with an automatic investment plan) and $50
additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o 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. Minimum investments: No initial or
additional minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds. There are certain other
requirements and the group must have a purpose other than buying fund
shares without a sales charge.
Please note that Advisor Class shares of the fund are no longer available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may continue
to invest in the fund's Advisor Class shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic Franklin Bond Fund. Franklin Bond Fund. Include
of envelope] your account number on the
Mail the check and your check.
BY MAIL signed application to
Investor Services. Fill out the deposit slip
from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic Call to receive a wire Call to receive a wire
of three control number and wire control number and wire
lightning bolts] instructions. instructions.
Mail your signed application To make a same day wire
to Investor Services. Please investment, please call us
BY WIRE include the wire control by 1:00 p.m. pacific time
number or your new account and make sure your wire
1-800/632-2301 number on the application. arrives by 3:00 p.m.
(or
1-650/312-2000 To make a same day wire
collect) investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic Call Shareholder Services at Call Shareholder Services at
of two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#] for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX 7777,
SAN MATEO, CA 94403-7777
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You also may exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund,you also may
exchange your shares for Class A shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class or Class Z shares if you otherwise qualify
to buy the fund's Advisor Class or Class Z shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
o you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you may need to complete additional forms. For
participants under age 59 1/2, tax penalties may apply. Call Retirement Plan
Services at 1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of three proceeds of $1,000 or more wired to a bank or
lightning bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a wire, please make sure we
have your bank account information on file. If
BY WIRE we do not have this information, you will need
to send written instructions with your bank's
name and address, your bank account number,
the ABA routing number, and a signature
guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below,
directions] or send signed written instructions. See the
policies above for selling shares by mail or
BY EXCHANGE phone.
If you hold share certificates, you will need
to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 777 MARINERS ISLAND BLVD., P.O. BOX 7777,
SAN MATEO, CA 94403-7777]
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares
outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise made large or frequent exchanges. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You
can also call us at one of the following numbers. For your protection and to
help ensure we provide you with quality service, all calls may be monitored
or recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 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 Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-4986
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS A & C
FRANKLIN EQUITY INCOME FUND - CLASS A, B & C
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS A & C
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND - CLASS A
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated March 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
The Convertible Fund's investment goal is to maximize total return, consistent
with reasonable risk, by seeking to optimize capital appreciation and high
current income under varying market conditions.
The Equity Income Fund's investment goal is to maximize total return through
emphasis on high current income and long-term capital appreciation, consistent
with reasonable risk.
The Global Fund's investment goal is to provide high current income, consistent
with preservation of capital, with capital appreciation as a secondary
consideration.
The Short-Intermediate Fund's investment goal is to provide as high a level of
current income as is consistent with prudent investing while seeking
preservation of shareholders' capital.
These goals are fundamental, which means they may not be changed without
shareholder approval.
CONVERTIBLE FUND
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, the fund considers to be consistent with its
investment objective. 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.
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.
EQUITY FUND
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 stocks offering current dividend yields above
the average of the market defined by the Standard & Poor's(R) 500 Index. The
fund may invest up to 35% of its net assets in other securities that, in the
aggregate, it considers to be consistent with its investment objective. Other
investments may include preferred stocks and fixed-income securities convertible
into common 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.
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.
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 goal: above-average dividend growth prospects, low
price to normalized earnings (projected earnings under normal operating
conditions), to cash flow, to book value, and/or to realizable liquidation
value.
The fund's current investment strategy is not a fundamental policy of the fund
and is subject to change at the discretion of the Board and without prior
shareholder approval.
GLOBAL FUND
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). The fund
considers securities issued by central banks that are guaranteed by their
national governments to be government securities.
The fund selects investments to provide a high current yield and currency
stability, or a combination of yield, capital appreciation, and 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, options on futures, and
interest rate swaps, all of which are generally considered "derivative
securities."
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, the fund will evaluate a
country's economic and political conditions such as inflation rate, growth
prospects, global trade patterns, and government policies.
As a global fund, the fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the euro or the European Currency Unit (ECU).
Under normal economic conditions, the fund invests at least 65% of its total
assets 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 the manager expects interests rates
worldwide or in a particular country to rise, and longer when the manager
expects interest rates to fall.
The fund may also invest in other fixed-income securities of both domestic and
foreign issuers including 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. These fixed-income securities may involve
equity features, such as conversion or exchange rights or warrants for the
acquisition of stock of the same or a different issuer; participation based on
revenues, sales, or profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common stock are offered as a
unit). The fund will limit its investments in warrants, valued at the lower of
cost or market, to 5% of the fund's net assets or to warrants attached to
securities.
The fund may also 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 multinational currencies of issuers 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. U.S. rating agencies do not rate many debt
obligations of foreign issuers, especially developing market issuers, and their
selection for the fund depends on the manager's internal analysis.
SHORT-INTERMEDIATE FUND
The fund intends to invest up to 100% of its net assets in U.S. government
securities. As a fundamental policy, 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.
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,
the following: 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.
The fund may purchase certain U.S. government securities 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. The fund may realize capital losses when
securities purchased at a premium are held to maturity or are called or redeemed
at a price lower than their purchase price. The fund may also realize capital
gains or losses upon the sale of securities.
CONCENTRATION The fund will not invest more than 25% of the value of its total
assets in any one particular industry.
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
investment by federal credit unions on January 1, 1998, 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 SHORT-INTERMEDIATE FUND CONSTITUTE LEGAL INVESTMENTS
FOR THEM.
All investments of the Short-Intermediate Fund will be subject to the following
limitations:
(a) All purchases and sales of securities will provide for delivery by
regular-way settlement. Regular-way settlement means delivery of a security from
a seller to a buyer within the time frame that the securities industry has
established for that type of security.
(b) Any investments by the Short-Intermediate Fund in variable-rate investments
will be limited to variable-rate investments where the index is tied to domestic
interest rates (including the U.S. dollar-denominated LIBOR) and not to foreign
currencies, foreign interest rates, or domestic or foreign commodity prices,
equity prices, or inflation rates.
(c) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to invest in such securities, any investments by the fund in a registered
investment company or collective investment fund will be limited to a company or
fund the prospectus of which restricts the investment portfolio to investments
and investment transactions that are permissible for federal credit unions.
(d) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to invest in collateralized mortgage obligations (CMOs) or real estate
mortgage investment conduits (REMICs), any investments by the fund in such
securities would be subject to the following conditions. In general, the
Short-Intermediate Fund may only invest in CMOs or REMICs that meet the
following tests, based on testing performed quarterly or more frequently as
required: (i) the CMO or REMIC's average life is 10 years or less; (ii) the CMO
or REMIC's estimated average life extends by 4 years or less, assuming an
immediate and sustained parallel shift in interest rates of up to and including
plus 300 basis points, and shortens by 6 years or less, assuming an immediate
and sustained parallel shift in interest rates of up to and including minus 300
basis points; and (iii) the CMO's or REMIC's estimated price change is 17
percent or less, as a result of an immediate and sustained parallel shift in
interest rates of up to and including plus and minus 300 basis points.
(e) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to do so, the fund may purchase and hold a municipal security only if a
nationally recognized statistical rating organization has rated it in one of the
highest rating categories.
(f) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to do so, the fund may invest in the following instruments issued by an
institution specified in Section 107(8) of the Federal Credit Union Act or
branch: (i) Yankee dollar deposits; (ii) Eurodollar deposits; (iii) banker's
acceptances; (iv) deposit notes; and (v) bank notes with original weighted
average maturities of less than five years.
(g) The Short-Intermediate Fund will only engage in repurchase transactions, in
which the fund agrees to purchase a security from a counterparty and to resell
the same or an identical security to that counterparty at a specified future
date and at a specified future price, under the following conditions: (i) the
repurchase securities will be legal investments for federal credit unions; (ii)
the fund will receive a daily assessment of the market value of the repurchase
securities, including accrued interest, and maintain adequate margin that
reflects a risk assessment of the repurchase securities and the term of the
transaction; and (iii) the fund will have entered into signed contracts with all
approved counterparties.
(h) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, 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 agreements subject to the following conditions: (i)
any securities the fund receives will be permissible investments for federal
credit unions, the fund will receive a daily assessment of their market value,
including accrued interest, and the fund will maintain adequate margin that
reflects a risk assessment of the securities and the term of the transaction;
(ii) any investments the fund purchases with any cash it receives will be
permissible for federal credit unions and mature no later than the maturity of
the transaction; and (iii) the fund will have entered into signed contracts with
all approved counterparties.
(i) The Short-Intermediate Fund may engage in securities lending transactions
subject to the following conditions: (i) the fund will receive written
confirmation of the loan; (ii) the collateral for the loan will consist of cash,
and any investments the fund purchases with that cash will be permissible for
federal credit unions and will mature no later than the maturity of the
transaction; and (iii) the fund will have executed a written loan and security
agreement with the borrower.
(j) The Short-Intermediate Fund will not (i) purchase or sell financial
derivatives, such as futures, options, interest rate swaps, or forward rate
agreements; (ii) engage in adjusted trading or short sales; (iii) purchase
stripped mortgage backed securities, residual interests in CMOs or REMICs,
mortgage servicing rights, commercial mortgage related securities, or small
business related securities; or (iv) purchase a zero coupon investment with a
maturity date that is more than 10 years from the settlement date.
Below is additional information about the various securities the funds may buy.
EQUITY SECURITIES Equity securities generally entitle the holder to participate
in a company's general operating results. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock, as
well as securities convertible into common stocks. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants, or rights.
Warrants or rights give the holder the right to buy a common stock at a given
time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value per share.
Independent rating organizations rate debt and convertible securities based upon
their assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Below investment grade securities are generally
those rated Ba or lower by Moody's Investors Service, Inc. (Moody's) or BB or
lower by Standard & Poor's Corporation(R) (S&P). Please see the Appendix for a
description of ratings.
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 that are rated
at least B or above by Moody's or S&P, or if unrated, are at least of comparable
quality as determined by the manager. To the extent the fund acquires securities
rated B or unrated securities of comparable quality, these securities are
regarded as speculative in nature. 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. The
funds will not invest in securities the manager believes involve excessive risk.
In the event a ratings service changes the rating on an issue held in a fund's
portfolio or the security goes into default, the manager will consider that
event in its evaluation of the overall investment merits of that security but
will not necessarily sell the security.
The Equity 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 Equity
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. The Equity 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.
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 funds' assets but will not be a
determining or limiting factor. In its investment analysis of securities being
considered for a fund's portfolio, rather than relying principally on the
ratings assigned by rating services, the manager may also consider, among other
things, 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.
OTHER FIXED-INCOME SECURITIES. The Global 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).
FOREIGN SECURITIES The Convertible Fund and the Equity Fund will generally buy
foreign securities that are traded in the U.S. or buy sponsored or unsponsored
American Depositary Receipts (ADRs). Each fund may, however, buy the securities
of foreign issuers directly in foreign markets so long as, in the manager's
judgment, an established public trading market exists. The Convertible Fund and
the Equity Fund may invest up to 30% of net assets in foreign securities not
publicly traded in the U.S. The Equity Fund may not invest more than 10% of its
total assets in securities of developing markets.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents. A
fund does not consider any security that it acquires outside the U.S. and that
is publicly traded in the U.S., on a foreign securities exchange, or in a
foreign securities market to be illiquid 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.
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.
DEPOSITARY RECEIPTS. American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. Generally, depositary receipts in registered
form are designed for use in the U.S. securities market, and depositary receipts
in bearer form are designed for use in securities markets outside the U.S.
Depositary receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below.
OBLIGATIONS OF DEVELOPING COUNTRIES. The Global Fund may invest in 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
Global Fund the potential for current U.S. dollar income. These instruments are
not traded on any exchange. However, the manager believes there may be a market
for such securities either in multinational companies wishing to purchase such
assets at a discount for further investment, or from the issuing governments
which may decide to redeem their obligations at a discount.
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 both interest rate and
market movements can influence its value, 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.
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 each 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.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS--each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly dividends. Through this structure the company establishes a
wholly owned special purpose vehicle whose sole purpose is to issue convertible
preferred stock. The offering proceeds pass-through to the company who issues
the special purpose vehicle a convertible subordinated debenture with identical
terms to the convertible preferred issued to investors. Benefits to the issuer
include increased equity credit from rating agencies and the deduction of coupon
payments for tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into common
stock at maturity and offers investors a higher current dividend than the
underlying common stock. The difference between these structures and other
mandatories is that the participation in stock price appreciation is capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest is
actually paid, the accrued interest may be deducted for tax purposes. Because of
their put options, these bonds tend to be less sensitive to changes in interest
rates than either long maturity bonds or preferred stocks. The put options also
provide enhanced downside protection while retaining the equity participation
characteristics of traditional convertible bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. A fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular security
at any given time. Reduced liquidity may have an adverse impact on market price
and the fund's ability to dispose of particular securities, when necessary, to
meet the fund's liquidity needs or in response to a specific economic event,
such as the deterioration in the credit worthiness of an issuer. Reduced
liquidity in the secondary market for certain securities may also make it more
difficult for the fund to obtain market quotations based on actual trades for
purposes of valuing the fund's portfolio. The Convertible Fund and the Equity
Fund, however, intend to acquire liquid securities, though there can be no
assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The Convertible Fund may invest a portion of its assets
in "synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "equity securities"
for purposes of the fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the manager 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 the manager determines that such a
combination would better promote the fund's investment objectives. In addition,
the component parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic convertible faces
the risk that the price of the stock, or the level of the market index
underlying the convertibility component will decline.
REAL ESTATE INVESTMENT TRUSTS ("REITS"). The Equity Fund may invest up to 15% 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.
BANK SECURITIES The Global 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 Global Fund may acquire loan participations in which the
fund will buy from a lender a portion of a larger loan that the lender 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.
Loan participations may have speculative characteristics. The Global 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 Global Fund 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. The Global Fund generally will
acquire loans 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). 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 Global 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 Global 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 the manager may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative factor
in the manager's analysis.
Loans are not readily marketable and may be subject to restrictions on resale.
Any secondary purchases and sales of loan participations generally are conducted
in private transactions between buyers and sellers.
When acquiring a loan participation, the Global 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 Global 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 Global 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
Global 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 Global 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.
U.S. GOVERNMENT SECURITIES The funds may invest in U.S. government securities.
U.S. government securities include U.S. Treasury obligations and obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
such as 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 funds may
invest, since it is not obligated to do so. These agencies and instrumentalities
are supported by 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.
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. 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.
ZERO COUPON BONDS The Short-Intermediate Fund may invest in zero coupon bonds
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
Zero coupon bonds are debt obligations that 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. 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.
CASH MANAGEMENT There are no restrictions or limitations on investments in
obligations of the U.S. or of corporations chartered by Congress as federal
government instrumentalities. The underlying assets of the funds 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 funds be retained in cash as is deemed
desirable or expedient under then-existing market conditions.
TEMPORARY INVESTMENTS When the funds' manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, if may invest each
fund's portfolio in a temporary defensive manner.
When maintaining a temporary defensive position, the Convertible 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.
When maintaining a temporary defensive position, the Equity 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.
During periods when the manager believes that the Global 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, or in cash (including foreign currency) or
cash-equivalent, short-term obligations, including, but not limited to, the
following: CDs, commercial paper, short-term notes, and repurchase agreements
secured by U.S. government securities. In particular, for defensive purposes a
larger portion of the Global 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 Each fund may lend its portfolio securities to
qualified securities dealers or other institutional investors, if such loans do
not exceed the following percentage of the value of the fund's total assets at
the time of the most recent loan: 30% in the case of the Global Fund, and 10% in
the case of the Short-Intermediate Fund, the Convertible Fund, and Equity Fund.
The borrower must deposit with the fund's custodian bank collateral with an
initial market value of at least 102% of the 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% (100% in the case of the Equity Fund). This collateral shall consist
of cash. 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 The Global Fund may purchase securities on a
"when-issued" or "forward-delivery" basis, and the Short-Intermediate Fund may
buy obligations on a when-issued or "delayed-delivery" basis, which means that
the obligations will be delivered at a future date. Although the Global Fund is
not limited in the amount of securities it may commit 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 Short-Intermediate Fund is not subject
to any percentage limit on the amount of its assets that may be invested in
when-issued purchase obligations. The fund does not pay for the securities until
received, nor does the fund start earning interest on them until the scheduled
delivery date. In order to invest its assets immediately while awaiting delivery
of securities purchased on such basis, the Global Fund will normally invest the
amount required to settle the transaction in short-term securities that offer
same-day settlement and earnings. These short-term securities may bear interest
at a lower rate than longer-term securities.
Purchases of securities on a when-issued, forward-delivery, or delayed-delivery
basis are subject to more risk than other types of purchases, including 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 a fund will generally buy securities on a when-issued
basis with the intention of acquiring the securities and not for speculative
purposes, it may sell the securities before the settlement date if it is deemed
advisable. In such a case, the fund may incur a gain or loss because of market
fluctuations during the period since the fund committed to purchase the
securities. When a 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 Short-Intermediate 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.
REPURCHASE AGREEMENTS In a repurchase agreement, a fund buys U.S. government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. A
custodian bank approved by the funds' Board of Trustees holds the securities
subject to resale on behalf of the fund. The bank or broker-dealer must transfer
to the custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities at a
later date. The securities are then marked-to-market daily to maintain coverage
of at least 100%. If the bank or broker-dealer does not repurchase the
securities as agreed, a fund may experience a loss or delay in the liquidation
of the securities underlying the repurchase agreement and may also incur
liquidation costs. The funds, however, intend to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy
(i.e., banks or broker-dealers that have been determined by the funds' manager
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction).
REVERSE REPURCHASE AGREEMENTS. The Global Fund may also enter into reverse
repurchase agreements, which are the opposite of repurchase agreements but
involve similar mechanics and risks. The Global 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 Global 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
Global Fund to experience a loss or delay in the liquidation costs. The Global
Fund intends to enter into reverse repurchase agreements with domestic or
foreign banks or securities dealers. The manager will evaluate the
creditworthiness of these entities prior to engaging in such transactions, under
the general supervision of the fund's Board of Trustees.
SHORT SALES AGAINST THE BOX The Convertible 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. 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 the manager believes the price
of the stock may decline and when, for tax or other reasons, the manager does
not currently want to 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 Global 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. The Global Fund will not make new investments
while any outstanding borrowings exceed 5% of its total assets. Neither the
Short-Intermediate Fund, nor the Convertible Fund, nor the Equity Fund borrows
money or mortgages or pledges any of its assets, except that each 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.
ILLIQUID INVESTMENTS Each 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.
Illiquid investments include, 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 each fund's total net assets.
Notwithstanding this limitation, the Board has authorized each fund to invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933, as amended (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 the 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 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 the manager to treat a restricted
security as a liquid security on an ongoing basis, including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, the manager and the Board will take into account the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent a fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the 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.
CURRENCY TECHNIQUES AND HEDGING The Global Fund may invest in options, futures,
options on futures, and forward contracts, although the fund has no present
intention of using any of these techniques except forward contracts. 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 Global Fund may enter into forward
currency exchange contracts (forward contracts) 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 that 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. Similarly, 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 the manager, impede portfolio management or the ability
of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.
The Board has adopted the requirement that the Global Fund may only use futures
contracts and options on futures contracts for hedging purposes and not for
speculation. In addition, the Global 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.
OPTIONS ON FOREIGN CURRENCIES. The Global 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.
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.
DERIVATIVE SECURITIES Although the funds have no present intention of investing
in the following types of securities, the funds may invest in the securities
described below. These securities are generally considered "derivative
securities."
OPTIONS. The Global Fund, the Convertible Fund, and the Equity Fund may
invest in options as described below.
Although the Global Fund's present policy, which may be changed without
shareholder approval, is not to invest in options on securities, the fund may
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.
The Convertible Fund may write covered call options on securities it owns that
are listed for trading on a national securities exchange. The Convertible 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 Convertible Fund's investment
in options will be for portfolio hedging purposes in an effort to stabilize
principal fluctuations and not for speculation. The Convertible Fund's
investments in options will not exceed 5% of its net assets.
Although the Equity Fund's present policy, which may be changed without
shareholder approval, is not to invest in options, 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 Convertible Fund and the Equity Fund may each 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.
It will generally be the Convertible Fund's and the Equity 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. The premium which a
fund will pay in executing a closing purchase transaction may be higher or lower
than the premium it received when writing the option, depending in large part
upon the relative price of the underlying security at the time of each
transaction. The aggregate premiums paid on all such options held at any time
will not exceed 20% of the Convertible Fund's net assets.
The risks of the Global Fund's transactions in options on foreign exchanges are
similar to the risks of investing in foreign securities. In addition, a foreign
exchange may impose different exercise and settlement terms, procedures, and
margin requirements than an U.S. exchange.
The Global Fund, the Convertible Fund, and the Equity Fund may each buy put
options to hedge against a decline in the value of its portfolio. By using put
options in this way, a 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 Global 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 any benefit the
Global Fund may realize upon exercise of the option. Unless the price of the
underlying security rises sufficiently, the option may expire resulting in a
loss to the Global Fund equal to the cost of the options.
The ability of the Global Fund to engage in options transactions is subject to
the following limitations: a) the fund may not invest more than 5% of its total
assets 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 fund's net
assets; and c) the aggregate premiums on all options purchased by the fund may
not exceed 20% of its net assets.
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.
When a fund writes or sells covered call options, it will receive a cash premium
which can be used in whatever way is felt to be most beneficial to the fund. The
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.
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. A fund may pay for a
put either separately or by paying a higher price for securities that are
purchased subject to a put, thereby increasing the cost of the securities and
reducing the yield otherwise available from the same securities.
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. 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. If the Global 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. However, a writer or holder of an option may not effect a closing
transaction after being notified of the exercise of the option.
A 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. A 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.
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. There is no guarantee in any particular situation that either
a closing purchase or a closing sale transaction can be effected. If a 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 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.
There is no assurance that a liquid market will exist for a given option at any
particular time. To mitigate this risk, the Convertible Fund and the Equity 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. During the option period, if a fund has written a covered call option,
it will have given up the opportunity to profit from a price increase in the
underlying securities above the exercise price in return for the premium on the
option. However, 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.
The Global 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.
The Convertible Fund and the Equity Fund may each 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.
INTEREST RATE SWAPS. The Global 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.
Interest rate swaps permit a party seeking a floating rate obligation 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 to acquire the
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.
FUTURES CONTRACTS. The Global 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.
The Global 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, GNMA
modified pass-through mortgage-backed securities, and three-month U.S. Treasury
bills. The Global 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.
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 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 Global Fund
will incur brokerage fees when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash (securities) or foreign currency
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets are
subject to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash (securities) or foreign currency and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by the manager may still not result in a successful hedging transaction.
OPTIONS ON FUTURES CONTRACTS. The Global 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 Global 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 Global 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 Global 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
Global 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 Global 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 Global 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 Global Fund will be able to use these instruments effectively for
the purposes set forth above. Furthermore, the Global Fund's ability to engage
in options on futures transactions may be limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES. The Global 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.
As with other types of options, however, the benefit the Global 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 Global 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 Global Fund may also write options on foreign currencies for hedging
purposes. 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 Global 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 Global 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.
The Global 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 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.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Convertible Fund, the Equity Fund and the Short-Intermediate 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 the SAI.
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 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 that 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 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 "Goals and Strategies"). The Convertible Fund and the Equity 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 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 Templeton 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 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 funds from investing in real estate
investment trusts ("REITs") if they meet the investment objective and policies
of the fund. The Equity Fund, as noted in the prospectus, may invest up to 15%
of its net assets in REITs.
The Global 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. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
8. Invest in interests in oil, gas or other mineral exploration or development
programs.
9. Invest in companies for the purpose of exercising control or management.
10. 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.
The Global Fund presently has the following additional restrictions, which are
not fundamental and may be changed without shareholder approval.
The Global Fund may not:
1. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
2. Purchase securities of other investment companies.
3. 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.
The Convertible Fund and the Global Fund may also be subject to investment
limitations imposed by foreign jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
funds intend to sell such investments as soon as practicable while maximizing
the return to shareholders.
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.
RISKS
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LOWER RATED SECURITIES Because the Global Fund and the Convertible Fund may
invest in securities below investment grade, an investment in the fund is
subject to a higher degree of risk than an investment in a fund that invests
primarily in higher-quality securities. You should consider the increased risk
of loss to principal that is present with an investment in higher risk
securities, such as those in which the Global Fund and the Convertible Fund
invest. Accordingly, an investment in the Global Fund or the Convertible 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.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Global Fund's or the Convertible Fund's portfolio defaults, the fund may
have unrealized losses on the security, which may lower the fund's net asset
value. Defaulted securities tend to lose much of their value before they
default. Thus, the Global Fund's or the Convertible Fund's Net Asset Value may
be adversely affected before an issuer defaults. In addition, the Global Fund or
the Convertible Fund may incur additional expenses if it must try to recover
principal or interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more difficult
for a fund to manage the timing of its income. To generate cash to satisfy these
distribution requirements, the Global Fund or the Convertible Fund may have to
sell portfolio securities that it otherwise may have continued to hold or use
cash flows from other sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Global Fund or the Convertible Fund's
ability to sell a security in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer, or if necessary to meet the
fund's liquidity needs. Reduced liquidity may also make it more difficult to
obtain market quotations based on actual trades for purposes of valuing the
Global Fund or the Convertible Fund's portfolio.
The Global Fund and the Convertible Fund may buy high yield, 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 Global Fund or the Convertible 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 Global Fund or the
Convertible Fund may also incur special costs in disposing of restricted
securities, although the Global Fund or the Convertible Fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The Global Fund and the Convertible Fund may buy high yield, 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. Neither the Global Fund nor the Convertible Fund has
an 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 before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Global Fund's or the
Convertible Fund's net asset value.
The Global Fund and the Convertible Fund rely on the manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the manager takes into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
The tables below show the percentage of the Global Fund's and the Convertible
Fund's assets invested in securities rated by S&P or Moody's in the rating
categories shown. A credit rating by a rating agency evaluates the safety of
principal and interest based on an evaluation of the security's credit quality,
but does not consider the market risk or the risk of fluctuation in the price of
the security. The information shown is based on a dollar-weighted average of
each fund's portfolio composition based on month-end assets for each of the 12
months in the fiscal year ended October 31, 1998.
GLOBAL FUND
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
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AAA ........................................ 80.0%
BB+ ........................................ 0.5%
BB ......................................... 10.7%
BB- ........................................ 4.9%
B+ ......................................... 2.7%
B1 ......................................... 2.4%
CCC+ ....................................... 0.8%
1. 0.7% are unrated and have been included in the B rating category.
CONVERTIBLE FUND
AVERAGE WEIGHTED
MOODY'S RATING PERCENTAGE OF ASSETS
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Aaa......................................... 0.46%
Aa 1........................................ 1.29%
A 2......................................... 11.02%
Baa ........................................ 22.72%
Ba 3........................................ 17.74%
B 4......................................... 27.98%
Caa ........................................ 1.77%
1. 0.59% are unrated and have been included in the Aa rating category.
2. 1.76% are unrated and have been included in the A rating category.
3. 2.84% are unrated and have been included in the Ba rating category.
4. 12.38% are unrated and have been included in the B rating category.
NON-DIVERSIFICATION RISK Because the Global Fund is non-diversified, there is no
restriction on the percentage of its assets that it may invest at any time in
the securities of any issuer. Nevertheless, the Global 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 invest a larger
portion of its assets in securities of a small number of issuers.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Investments in depositary receipts also involve some or all of
the risks described below.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), restrictions on removal of assets, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. A fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than those
in the U.S. or other major economies. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. Foreign markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. Settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The funds may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
A fund's investments in foreign securities may increase the risks with respect
to the liquidity of the fund's portfolio. This could inhibit the fund's ability
to meet a large number of shareholder redemption requests in the event of
economic or political turmoil in a country in which the fund has a substantial
portion of its assets invested or deterioration in relations between the U.S.
and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict the fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (viii) foreign taxation; (ix)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (x)
the absence of a capital market structure or market-oriented economy; and (xi)
the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
CURRENCY The funds' management endeavors to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread in currency exchange (to
cover service charges) may be incurred, particularly when a fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Some countries may adopt policies that would prevent a fund from transferring
cash out of the country or withhold portions of interest and dividends at the
source.
The funds may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the funds may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Certain currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. The funds'
manager endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where, from time to time, it places
the fund's investments.
Any investments by the funds 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 tax laws and laws limiting the amount and types
of foreign investments. Although current regulations do not, in the opinion of
the funds' manager, limit seriously the funds' investment activities, if they
were changed in the future they might restrict the ability of a fund to make its
investments or tend to impair the liquidity of the fund's investments. Changes
in governmental administrations, economic or monetary policies in the U.S. or
abroad, or circumstances in dealings between nations could result in investment
losses for the funds and could adversely affect the funds' operations.
The funds' Board of Directors (Board) considers at least annually the likelihood
of the imposition by any foreign government of exchange control restrictions
that would affect the liquidity of the funds' assets maintained with custodians
in foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The Board also
considers the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith, or gross negligence on the part of
the funds' manager, any losses resulting from the holding of a fund's portfolio
securities in foreign countries and/or with securities depositories will be at
the risk of the shareholders. No assurance can be given that the Board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
The Global 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
Global Fund's assets denominated in the foreign currency. These changes will
also affect the Global Fund's yield, income, and distributions to shareholders.
In addition, although the Global 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 Global
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 Global 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 Global 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.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the funds, the funds' manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
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). The manager considers both credit risk
and market risk in making investment decisions as to corporate debt obligations.
Debt obligations 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, a fund's performance may be affected by the manager's ability to
anticipate and respond to fluctuations in market interest rates, to the extent
of the fund's investment in debt obligations.
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. REITs may not be diversified and
are subject to the risks of financing projects.
FINANCIAL SERVICES COMPANIES Because the Equity Fund invests in stocks of
financial services companies, the fund's investments and performance will be
affected by general market and economic conditions as well as other risk factors
particular to the financial services industry. Financial services companies are
subject to extensive government regulation. This regulation may limit both the
amount and types of loans and other financial commitments a financial services
company can make, and the interest rates and fees it can charge. Such
limitations may have a significant impact on the profitability of a financial
services company since that profitability is attributable, at least in part, to
the company's ability to make financial commitments such as loans. Profitability
of a financial services company is largely dependent upon the availability and
cost of the company's funds, and can fluctuate significantly when interest rates
change. The financial difficulties of borrowers can negatively impact the
industry to the extent that borrowers may not be able to repay loans made by
financial services companies.
Insurance companies may be subject to severe price competition, claims activity,
marketing competition and general economic conditions. Particular insurance
lines will also be influenced by specific matters. Property and casualty insurer
profits may be affected by certain weather catastrophes and other disasters.
Life and health insurer profits may be affected by mortality risks and morbidity
rates. Individual insurance companies may be subject to material risks including
inadequate reserve funds to pay claims and the inability to collect from the
insurance companies which insure insurance companies, so-called reinsurance
carriers.
Congress is currently considering legislation that would reduce the separation
between commercial and investment banking businesses. Commercial banks typically
have been limited to certain non-securities activities such as making loans and
accepting deposits. Investment banks have typically engaged in more extensive
securities activities. If enacted, the proposed legislation could significantly
impact the industry. While banks may be able to expand the services which they
offer if legislation broadening bank powers is enacted, expanded powers could
expose banks to well-established competitors, particularly as the historical
distinctions between banks and other financial institutions erode. In addition,
the financial services industry is an evolving and competitive industry that is
undergoing significant change. Such changes have resulted from various
consolidations as well as the continual development of new products, structures
and a regulatory framework that is anticipated to be subject to further change.
OPTIONS ON 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 a 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, a 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. A 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. The Global Fund may use out-of-the-money, at-the-money, and in-the-money
put options in the same market environments in which it uses call options in
equivalent buy-and-write transactions.
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 Global 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, 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 a 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 Global Fund's option trading activities, it intends to comply
with the California Corporate Securities Rules as they pertain to prohibited
investments.
A 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 Global
Fund believes that the use of futures contracts will benefit the fund, if the
manager's investment judgment about the general direction of interest or
currency exchange rates is incorrect, the fund's overall performance would be
poorer than if it had not entered into any such contract. For example, if the
Global 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 Global 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 Global 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 that reflect the rising
market. The Global 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 Global 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 Global 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.
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 Global Fund to use forward contracts
could be restricted to the extent that Congress authorizes 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 are 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 Global 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.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible 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 trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
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Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Edward B. Jamieson (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
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 or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Director, Quarterdeck Corporation (software
firm) and Digital Transmission Systems, Inc. (wireless communications); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, Fischer Imaging
Corporation (medical imaging systems) and General Partner, Peregrine Associates,
which was the General Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities Dealers,
Inc.
*Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
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Frank H. Abbott, III $17,410 $165,937 27
Harris J. Ashton 17,264 344,642 49
S. Joseph Fortunato 16,946 361,562 51
Edith E. Holiday 12,925 72,875 25
Frank W. T. LaHaye 18,010 141,433 27
Gordon S. Macklin 17,264 337,292 49
1. For the fiscal year ended October 31, 1998. During the period from October
31, 1997, through May 31, 1998, fees at the rate of $925 per month plus $925 per
board meeting attended were in effect.
2. For the calendar year ended December 31, 1997.
3. 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 54 registered investment companies, with approximately 168 U.S. based
funds or series.
Noninterested board members 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 or trustee. 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 Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
The manager is wholly owned by Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may 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 by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) 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.
The Global Fund's sub-advisor is Templeton Investment Counsel, Inc. The
sub-advisor has an agreement with the manager and provides the manager with
investment management advice and assistance. The sub-advisor furnishes, subject
to the manager's discretion, a portion of the investment advisory services for
which the manager is responsible pursuant to the management agreement. These
responsibilities may include managing a portion of the Global Fund's investments
and supplying research services. The sub-advisor's activities are subject to the
board's review and control, as well as the manager's instruction and
supervision.
MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:
o 5/96% of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over $250
million; and
o 9/240 of 1% of the value of net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
Management Fees Paid ($)
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1998 1997 1996
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Convertible Fund.............. 1,377,487 1,075,628 699,454
Equity Fund .................. 2,419,689 1,783,336 1,251,297
Global Fund .................. 722,502 785,629 866,730
Short-Intermediate Fund....... 1,118,373 1,076,296 1,142,250
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.35% of the average monthly net assets up to and including $100 million;
o 0.25% of the average monthly net assets over $100 million and not over
$250 million; and
o 0.20% of the average monthly net assets in excess of $250 million.
The manager pays this fee from the management fees it receives from the Global
Fund. For the last three fiscal years ended October 31, the manager paid the
following sub-advisory fees:
Sub-Advisory Fees Paid ($)
- -------------------------------------------------
1998 398,702
1997 428,496
1996 473,601
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended October 31, the manager paid FT Services
the following administration fees:
Administration Fees Paid ($)
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1998 1997
- ------------------------------------------------------------------------------
Convertible Fund.............. 369,613 297,444
Equity Fund .................. 678,739 514,630
Global Fund .................. 179,253 215,869
Short-Intermediate Fund....... 296,460 310,121
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The fund
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager selects brokers and dealers to execute the Convertible Fund's and
the Equity 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, the manager 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 is negotiated between
the manager 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. The manager 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 the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager 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 the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
Since most purchases by the Global Fund and the Short-Intermediate Fund are
principal transactions at net prices, the funds incur little or no brokerage
costs. The funds deal 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 funds seek 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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager 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, the manager 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, 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 Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the
manager, 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 may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended October 31, the Convertible Fund and
the Equity Fund paid the following brokerage commissions:
Brokerage Commissions ($)
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Convertible Fund.............. 107,591 147,042 84,758
Equity Fund .................. 453,051 401,820 293,423
During the same periods, the Global Fund and the Short Intermediate Fund did not
pay any brokerage commissions.
As of October 31, 1998, the Global Fund and the Short-Intermediate Fund did not
own securities of its regular broker-dealers. As of the same date, the
Convertible Fund owned securities issued by Salomon Smith Barney Holdings, Inc.
valued in the aggregate at $1,481,000, and the Equity Fund owned securities
issued by J.P. Morgan & Co., Inc. valued in the aggregate at 3,582,000. Except
as noted, the Convertible Fund and the Equity Fund did not own any securities
issued by its regular broker-dealers as of the end of the fiscal year.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes the fund's net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the fund. If this election is made, the year-end statement you receive from the
fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. The fund will
provide you with the information necessary to complete your individual income
tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the Global Fund's and the
Short-Intermediate Fund's income consists of interest rather than dividends, no
portion of its distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the fund for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
As a corporate shareholder, you should note that 17.37% of the dividends paid by
the Convertible Fund and 61.90% of the dividends paid by the Equity Fund for the
most recent fiscal year qualified for the dividends-received deduction. You will
be permitted in some circumstances to deduct these qualified dividends, thereby
reducing the tax that you would otherwise be required to pay on these dividends.
The dividends-received deduction will be available only with respect to
dividends designated by a fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculations.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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The Global Fund is a nondiversified series, and each other fund is a diversified
series of Franklin Investors Securities Trust, an open-end management investment
company, commonly called a mutual fund. The trust was organized as a
Massachusetts business trust on December 22, 1986, and is registered with the
SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
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 that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The Convertible Fund currently offers two classes of shares, Class A and Class
C. The Equity Fund currently offers three classes of shares, Class A, Class B,
and Class C. The Global Fund currently offers three classes of shares, Class A,
Class C and Advisor Class. The Short-Intermediate Fund currently offers two
classes of shares, Class A and Advisor Class. Before January 1, 1999, Class A
shares were designated Class I and Class C shares were designated Class II. The
Equity Fund began offering Class B shares on January 1, 1999. Each fund may
offer additional classes of shares in the future. The full title of each class
is:
o Franklin Convertible Securities Fund - Class A
o Franklin Convertible Securities Fund - Class C
o Franklin Equity Income Fund - Class A
o Franklin Equity Income Fund - Class B
o Franklin Equity Income Fund - Class C
o Franklin Global Government Income Fund - Class A
o Franklin Global Government Income Fund - Class C
o Franklin Global Government Income Fund - Advisor Class
o Franklin Short-Intermediate U.S. Government Securities Fund - Class A
o Franklin Short-Intermediate U.S. Government Securities Fund - Advisor
Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting may also be called by the board in its discretion.
As of December 7, 1998, the principal shareholders of the fund, beneficial or of
record, were:
Name and Address Share Class Percentage (%)
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GLOBAL FUND
Franklin Templeton Trust Company1
As Trustee for ValuSelect
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 Advisor Class 77.39
SHORT-INTERMEDIATE FUND
City of Scottsdale
Attn: Mark Kochman
3939 Civic Center Blvd.
Scottsdale, AZ 85251-4433 Class A 11.66
SHORT-INTERMEDIATE FUND
Templeton Funds Trust Company2
Attn: Vickie Nuzzo
100 Fountain Pky.
St. Petersburg, FL 33716-1205 Advisor Class 62.11
Franklin Templeton Trust Company1
Trust Services FBO
Harris J. Ashton IRA R/O
P.O. Box 7519
San Mateo, CA 94403-7519 Advisor Class 28.47
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
2. Templeton Funds Trust Company is a Florida corporation and is wholly owned by
Franklin Resources, Inc.
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 of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially 28% of the Short-Intermediate Fund - Advisor Class and
less than 1% of the outstanding shares of the other funds and classes. The board
members may own shares in other funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for the
Convertible Fund - Class A and the Equity Fund - Class A, 4.25% for the Global
Fund - Class A and 2.25% for the Short-Intermediate Fund - Class A, and 1% for
the Convertible Fund - Class C, the Equity Fund - Class C, and the Global Fund -
Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or 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 (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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 application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI may also qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions, although any such plan that purchased the fund's Class A
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in the fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Valuemark Funds or the Templeton Variable Products Series Fund. You
should contact your tax advisor for information on any tax consequences that
may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid and
the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
sales charge. We may enter into a special arrangement with a securities dealer,
based on criteria established by the fund, to add together certain small
qualified retirement plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
SALES IN TAIWAN. 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.
The fund's Class A shares 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 A
shares may be offered with the following schedule of sales charges:
CONVERTIBLE FUND AND EQUITY FUND
Size of Purchase - U.S. Dollars Sales Charge (%)
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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
GLOBAL FUND AND SHORT-INTERMEDIATE FUND
Size of Purchase - U.S. Dollars Sales Charge (%)
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Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the fund's
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of the Convertible Fund or the Equity Fund of $1 million or more: 1% on
sales of $1 million 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 pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of the Global Fund or 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 A shares by certain retirement plans without an initial sales
charge: 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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge may also be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class will generally be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the securities dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, or (iv) the securities dealer of record has entered into a
supplemental agreement with Distributors
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% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for Class
B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from retirement
plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans (not applicable to Class B)
EXCHANGE PRIVILEGE For the Convertible Fund, the Equity Fund and the Global
Fund, if you request the exchange of the total value of your account, declared
but unpaid income dividends and capital gain distributions will be reinvested in
the fund and exchanged into the new fund at net asset value when paid. For the
Short-Intermediate Fund, 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. 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. 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 CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
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 U.S. Securities and Exchange
Commission (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.
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 and to send the certificate and assignment form in separate
envelopes.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
the prospectus.
Franklin Templeton Investor Services, Inc. (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.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The Global Fund, the Convertible Fund, and the Equity Fund value portfolio
securities underlying actively traded call options at their market price as
determined above. The current market value of any option the fund holds is its
last sale price on the relevant exchange before the fund values its assets. If
there are no sales that day or if the last sale price is outside the bid and ask
prices, the fund values options within the range of the current closing bid and
ask prices if the fund believes the valuation fairly reflects the contract's
market value.
The Convertible Fund and the Equity Fund determine the value of a foreign
security as of the close of trading on the foreign exchange on which the
security is traded or as of the 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
foreign security is valued within the range of the most recent quoted bid and
ask prices. 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 NAV. 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.
For the Global Fund, 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 fund's NAV is not calculated. Thus,
the calculation of the fund's NAV 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 close of the NYSE. The value of these securities used in computing the NAV
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 close of the NYSE that will not be reflected in the computation of the NAV.
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 use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended October 31:
Amount Received
in Connection
Total Amount Retained with Redemptions
Commissions by Distributors and Repurchases
Received ($) ($) ($)
-----------------------------------------------------------------------------
1998
Convertible Fund 1,162,596 108,306 24,871
Equity Fund 1,861,175 180,988 25,388
Global Fund 234,760 13,932 2,369
Short-Intermediate Fund 383,582 50,338 -
1997
Convertible Fund 1,373,166 130,410 8,497
Equity Fund 1,524,045 144,609 13,137
Global Fund 16,188 12,577 3,054
Short-Intermediate Fund 330,666 42,408 -
1996
Convertible Fund 1,132,135 117,440 1,285
Equity Fund 1,819,338 186,833 1,595
Global Fund 27,589 293 813
Short-Intermediate Fund 229,997 29,004 -
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are 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; a
prorated portion of Distributors' overhead expenses; and the expenses of
printing prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.25% per year for the Convertible Fund and the Equity Fund, 0.15% per year for
the Global Fund, and 0.10% per year for the Short-Intermediate Fund, of Class
A's average daily net assets, payable quarterly. All distribution expenses over
this amount will be borne by those who have incurred them.
In implementing the Class A plan, the board has determined that the annual fees
payable by the Convertible Fund and the Equity Fund under the plan will be equal
to the sum of: (i) the amount obtained by multiplying 0.25% by the average daily
net assets represented by the fund's Class A shares 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 the fund's Class A shares that were acquired before May 1,
1994 (old assets). The board has determined that the annual fees payable by the
Global Fund under the plan will be equal to the sum of (i) 0.15% of new assets,
and (ii) 0.05% of old assets. The board has determined that the annual fees
payable by the Short-Intermediate Fund under the plan will be equal to the sum
of (i) 0.10% of new assets, and (ii) 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 of 0.25% for the Convertible Fund and the
Equity Fund, 0.15% for the Global Fund, and 0.10% for the Short-Intermediate
Fund is reached on a yearly basis, up to an additional 0.05% will be paid by the
Convertible Fund and the Equity Fund, and up to an additional 0.02% will be paid
by the Global Fund and 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 A expense. This means that all Class A 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 Fund and the Equity Fund, and 0.07% (0.05% plus 0.02%) for the
Global Fund and the Short-Intermediate Fund, of the average daily net assets of
Class A and, as Class A shares are sold on or after May 1, 1994, will increase
over time. Thus, as the proportion of Class A shares purchased on or after May
1, 1994, increases in relation to outstanding Class A shares, the expenses
attributable to payments under the plan will also increase (but will not exceed
0.25% of average daily net assets for the Convertible Fund and the Equity Fund,
0.15% of average daily net assets for the Global Fund, and 0.10% of average
daily net assets for the Short-Intermediate Fund). While this is the currently
anticipated calculation for fees payable under the Class A plan, the plan
permits the board to allow the fund to pay a full 0.25% on all assets of the
Convertible Fund or the Equity Fund, 0.15% on all assets of the Global Fund, and
0.10% on all assets of the Short-Intermediate Fund at any time. The approval of
the board would be required to change the calculation of the payments to be made
under the Class A plan.
The Class A plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS B (EQUITY FUND ONLY) AND C PLANS. Under the Class B and C plans, the
Convertible Fund and the Equity Fund pay Distributors up to 0.75% per year of
the class's average daily net assets, and the Global Fund pays Distributors up
to 0.50% per year, of the class's average daily net assets, payable quarterly,
to pay Distributors or others for providing distribution and related services
and bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The Convertible Fund and the Equity Fund
may also pay a servicing fee of up to 0.25% per year, and the Global Fund may
also pay a servicing fee of up to 0.15% per year, of the class's average daily
net assets, payable quarterly. 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 expenses relating to each of the Class B and C plans are also used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C 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, the manager or Distributors or other parties on behalf of the
fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, as amended, 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 National Association of Securities Dealers, Inc.
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 noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 the manager 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 noninterested board
members, 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, 1998, Distributors eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the plans
were:
Distributors' Eligible Amount Paid
Expenses ($) by the Fund ($)
- -------------------------------------------------------------------------
Convertible Fund - Class A 860,537 515,494
Convertible Fund - Class C 610,818 451,619
Equity Fund -Class A 1,518,121 1,030,358
Equity Fund - Class C 982,721 683,995
Global Fund - Class A 321,321 125,026
Global Fund - Class C 113,020 34,970
Short-Intermediate - Class A 575,945 175,727
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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial 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 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 initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial 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 returns for the indicated periods ended October 31, 1998, were:
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------
Class A
Convertible Fund -15.12% 7.38% 10.75%
Equity Fund 4.57% 11.80% 12.90%
Global Fund 1.12% 4.59% 7.20%
Short-Intermediate Fund 4.94% 4.49% 6.79%
Since
1 Year Inception Inception Date
- ----------------------------------------------------------------------------
Class C
Convertible Fund -12.30% 6.72% 10/2/95
Equity Fund 8.10% 14.85% 10/2/95
Global Fund 3.14% 7.40% 5/1/95
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 each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial 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, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated periods
ended October 31, 1998, were:
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------
Class A
Convertible Fund -15.12% 42.79% 177.61%
Equity Fund 4.57% 74.63% 236.33%
Global Fund 1.12% 25.68% 92.50%
Short-Intermediate Fund 4.94% 24.56% 92.89%
1 Year Since Inception Inception Date
- ----------------------------------------------------------------------------
Class C
Convertible Fund -12.30% 22.17% 10/2/95
Equity Fund 8.10% 53.16% 10/2/95
Global Fund 3.14% 29.68% 5/1/95
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 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 yields for the 30-day period ended October 31, 1998, were:
Class A Class C
- --------------------------------------------------------
Convertible Fund 5.67% 5.23%
Equity Fund 3.11% 2.54%
Global Fund 5.31% 4.96%
Short-Intermediate Fund 3.73% N/A
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE 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. 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 rates for the 30-day period ended October 31, 1998, were:
Class A Class C
- --------------------------------------------------------
Convertible Fund 4.81% 4.36%
Equity Fund 2.95% 2.43%
Global Fund 6.96% 6.69%
Short-Intermediate Fund 5.05% N/A
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 cumulative
total return, average annual total return and other measures of performance 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
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 goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 goal, 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:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines provide
performance statistics over specified time periods.
o 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.
o 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.
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Lehman Brothers Aggregate Bond Index or its component indices measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Yields and total return of other taxable investments including CDs, money
market deposit accounts, checking accounts, savings accounts, money market
mutual funds, and repurchase agreements.
o 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 IBC's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.
o Salomon Brothers World Government Bond Index, or its component indices. The
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.
o 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 certificates of deposit (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, if any, 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
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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 is one of the
oldest mutual fund organizations and now services more than 3 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, a pioneer in international investing. The Mutual Series team,
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 $216 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
DESCRIPTION OF BOND RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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 that 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. These
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. These 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 that are speculative to a high degree.
These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated March 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
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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.
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GOALS AND STRATEGIES
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The Global Fund's investment goal is to provide high current income, consistent
with preservation of capital, with capital appreciation as a secondary
consideration.
The Short-Intermediate Fund's investment goal is to provide as high a level of
current income as is consistent with prudent investing while seeking
preservation of shareholders' capital.
These goals are fundamental, which means they may not be changed without
shareholder approval.
GLOBAL FUND
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). The fund
considers securities issued by central banks that are guaranteed by their
national governments to be government securities.
The fund selects investments to provide a high current yield and currency
stability, or a combination of yield, capital appreciation, and 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, options on futures, and
interest rate swaps, all of which are generally considered "derivative
securities."
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, the fund will evaluate a
country's economic and political conditions such as inflation rate, growth
prospects, global trade patterns, and government policies.
As a global fund, the fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the euro or the European Currency Unit (ECU).
Under normal economic conditions, the fund invests at least 65% of its total
assets 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 the manager expects interests rates
worldwide or in a particular country to rise, and longer when the manager
expects interest rates to fall.
The fund may also invest in other fixed-income securities of both domestic and
foreign issuers including 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. These fixed-income securities may involve
equity features, such as conversion or exchange rights or warrants for the
acquisition of stock of the same or a different issuer; participation based on
revenues, sales, or profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common stock are offered as a
unit). The fund will limit its investments in warrants, valued at the lower of
cost or market, to 5% of the fund's net assets or to warrants attached to
securities.
The fund may also 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 multinational currencies of issuers 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. U.S. rating agencies do not rate many debt
obligations of foreign issuers, especially developing market issuers, and their
selection for the fund depends on the manager's internal analysis.
SHORT-INTERMEDIATE FUND
The fund intends to invest up to 100% of its net assets in U.S. government
securities. As a fundamental policy, 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.
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,
the following: 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.
The fund may purchase certain U.S. government securities 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. The fund may realize capital losses when
securities purchased at a premium are held to maturity or are called or redeemed
at a price lower than their purchase price. The fund may also realize capital
gains or losses upon the sale of securities.
CONCENTRATION The fund will not invest more than 25% of the value of its total
assets in any one particular industry.
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
investment by federal credit unions on January 1, 1998, 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 SHORT-INTERMEDIATE FUND CONSTITUTE LEGAL INVESTMENTS
FOR THEM.
All investments of the Short-Intermediate Fund will be subject to the following
limitations:
(a) All purchases and sales of securities will provide for delivery by
regular-way settlement. Regular-way settlement means delivery of a security from
a seller to a buyer within the time frame that the securities industry has
established for that type of security.
(b) Any investments by the Short-Intermediate Fund in variable-rate investments
will be limited to variable-rate investments where the index is tied to domestic
interest rates (including the U.S. dollar-denominated LIBOR) and not to foreign
currencies, foreign interest rates, or domestic or foreign commodity prices,
equity prices, or inflation rates.
(c) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to invest in such securities, any investments by the fund in a registered
investment company or collective investment fund will be limited to a company or
fund the prospectus of which restricts the investment portfolio to investments
and investment transactions that are permissible for federal credit unions.
(d) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to invest in collateralized mortgage obligations (CMOs) or real estate
mortgage investment conduits (REMICs), any investments by the fund in such
securities would be subject to the following conditions. In general, the
Short-Intermediate Fund may only invest in CMOs or REMICs that meet the
following tests, based on testing performed quarterly or more frequently as
required: (i) the CMO or REMIC's average life is 10 years or less; (ii) the CMO
or REMIC's estimated average life extends by 4 years or less, assuming an
immediate and sustained parallel shift in interest rates of up to and including
plus 300 basis points, and shortens by 6 years or less, assuming an immediate
and sustained parallel shift in interest rates of up to and including minus 300
basis points; and (iii) the CMO's or REMIC's estimated price change is 17
percent or less, as a result of an immediate and sustained parallel shift in
interest rates of up to and including plus and minus 300 basis points.
(e) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to do so, the fund may purchase and hold a municipal security only if a
nationally recognized statistical rating organization has rated it in one of the
highest rating categories.
(f) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to do so, the fund may invest in the following instruments issued by an
institution specified in Section 107(8) of the Federal Credit Union Act or
branch: (i) Yankee dollar deposits; (ii) Eurodollar deposits; (iii) banker's
acceptances; (iv) deposit notes; and (v) bank notes with original weighted
average maturities of less than five years.
(g) The Short-Intermediate Fund will only engage in repurchase transactions, in
which the fund agrees to purchase a security from a counterparty and to resell
the same or an identical security to that counterparty at a specified future
date and at a specified future price, under the following conditions: (i) the
repurchase securities will be legal investments for federal credit unions; (ii)
the fund will receive a daily assessment of the market value of the repurchase
securities, including accrued interest, and maintain adequate margin that
reflects a risk assessment of the repurchase securities and the term of the
transaction; and (iii) the fund will have entered into signed contracts with all
approved counterparties.
(h) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, 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 agreements subject to the following conditions: (i)
any securities the fund receives will be permissible investments for federal
credit unions, the fund will receive a daily assessment of their market value,
including accrued interest, and the fund will maintain adequate margin that
reflects a risk assessment of the securities and the term of the transaction;
(ii) any investments the fund purchases with any cash it receives will be
permissible for federal credit unions and mature no later than the maturity of
the transaction; and (iii) the fund will have entered into signed contracts with
all approved counterparties.
(i) The Short-Intermediate Fund may engage in securities lending transactions
subject to the following conditions: (i) the fund will receive written
confirmation of the loan; (ii) the collateral for the loan will consist of cash,
and any investments the fund purchases with that cash will be permissible for
federal credit unions and will mature no later than the maturity of the
transaction; and (iii) the fund will have executed a written loan and security
agreement with the borrower.
(j) The Short-Intermediate Fund will not (i) purchase or sell financial
derivatives, such as futures, options, interest rate swaps, or forward rate
agreements; (ii) engage in adjusted trading or short sales; (iii) purchase
stripped mortgage backed securities, residual interests in CMOs or REMICs,
mortgage servicing rights, commercial mortgage related securities, or small
business related securities; or (iv) purchase a zero coupon investment with a
maturity date that is more than 10 years from the settlement date.
Below is additional information about the various securities the funds may buy.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value per share.
Independent rating organizations rate debt and convertible securities based upon
their assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Below investment grade securities are generally
those rated Ba or lower by Moody's Investors Service, Inc. (Moody's) or BB or
lower by Standard & Poor's Corporation(R) (S&P). Please see the Appendix for a
description of ratings.
The funds will not invest in securities the manager believes involve excessive
risk. In the event a ratings service changes the rating on an issue held in a
fund's portfolio or the security goes into default, the manager will consider
that event in its evaluation of the overall investment merits of that security
but will not necessarily sell the security.
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 funds' assets but will not be a
determining or limiting factor. In its investment analysis of securities being
considered for a fund's portfolio, rather than relying principally on the
ratings assigned by rating services, the manager may also consider, among other
things, 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.
OTHER FIXED-INCOME SECURITIES. The Global 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).
U.S. GOVERNMENT SECURITIES The funds may invest in U.S. government
securities. U.S. government securities include U.S. Treasury obligations and
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, such as 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 funds may invest, since it is not obligated to do so. These
agencies and instrumentalities are supported by 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.
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. 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.
FOREIGN SECURITIES 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. The Global Fund does not consider any security that it acquires
outside the U.S. and that is publicly traded in the U.S., on a foreign
securities exchange, or in a foreign securities market to be illiquid 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.
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.
OBLIGATIONS OF DEVELOPING COUNTRIES. The Global Fund may invest in 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
Global Fund the potential for current U.S. dollar income. These instruments are
not traded on any exchange. However, the manager believes there may be a market
for such securities either in multinational companies wishing to purchase such
assets at a discount for further investment, or from the issuing governments
which may decide to redeem their obligations at a discount.
ZERO COUPON BONDS The Short-Intermediate Fund may invest in zero coupon bonds
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
Zero coupon bonds are debt obligations that 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. 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.
EQUITY SECURITIES Equity securities generally entitle the holder to participate
in a company's general operating results. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock, as
well as securities convertible into common stocks. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants, or rights.
Warrants or rights give the holder the right to buy a common stock at a given
time for a specified price.
BANK SECURITIES The Global 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 Global Fund may acquire loan participations in which the
fund will buy from a lender a portion of a larger loan that the lender 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.
Loan participations may have speculative characteristics. The Global 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 Global Fund 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. The Global Fund generally will
acquire loans 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). 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 Global 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 Global 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 the manager may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative factor
in the manager's analysis.
Loans are not readily marketable and may be subject to restrictions on resale.
Any secondary purchases and sales of loan participations generally are conducted
in private transactions between buyers and sellers.
When acquiring a loan participation, the Global 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 Global 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 Global 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
Global 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 Global 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.
CASH MANAGEMENT There are no restrictions or limitations on investments in
obligations of the U.S. or of corporations chartered by Congress as federal
government instrumentalities. The underlying assets of the funds 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 funds be retained in cash as is deemed
desirable or expedient under then-existing market conditions.
TEMPORARY INVESTMENTS When the funds' manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, it may invest each
fund's portfolio in a temporary defensive manner.
During periods when the manager believes that the Global 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, or in cash (including foreign currency) or
cash-equivalent, short-term obligations, including, but not limited to, the
following: CDs, commercial paper, short-term notes, and repurchase agreements
secured by U.S. government securities. In particular, for defensive purposes a
larger portion of the Global 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 Each fund may lend its portfolio securities to
qualified securities dealers or other institutional investors, if such loans do
not exceed the following percentage of the value of the fund's total assets at
the time of the most recent loan: 30% in the case of the Global Fund, and 10% in
the case of the Short-Intermediate Fund. The borrower must deposit with the
fund's custodian bank collateral with an initial market value of at least 102%
of the 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. 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 The Global Fund may purchase securities on a
"when-issued" or "forward-delivery" basis, and the Short-Intermediate Fund may
buy obligations on a when-issued or "delayed-delivery" basis, which means that
the obligations will be delivered at a future date. Although the funds are not
limited in the amount of securities they may commit to buy on such basis, it is
expected that under normal circumstances the Global 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 the scheduled delivery date. In order to invest its assets immediately
while awaiting delivery of securities purchased on such basis, the Global Fund
will normally invest the amount required to settle the transaction in short-term
securities that offer same-day settlement and earnings. These short-term
securities may bear interest at a lower rate than longer-term securities.
Purchases of securities on a when-issued, forward-delivery, or delayed-delivery
basis are subject to more risk than other types of purchases, including 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 a fund will generally buy securities on a when-issued
basis with the intention of acquiring the securities and not for speculative
purposes, it may sell the securities before the settlement date if it is deemed
advisable. In such a case, the fund may incur a gain or loss because of market
fluctuations during the period since the fund committed to purchase the
securities. When a 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 Short-Intermediate 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.
REPURCHASE AGREEMENTS In a repurchase agreement, a fund buys U.S. government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. A
custodian bank approved by the funds' board of trustees (Board) holds the
securities subject to resale on behalf of the fund. The bank or broker-dealer
must transfer to the custodian securities with an initial market value of at
least 102% of the repurchase price to help secure the obligation to repurchase
the securities at a later date. The securities are then marked-to-market daily
to maintain coverage of at least 100%. If the bank or broker-dealer does not
repurchase the securities as agreed, a fund may experience a loss or delay in
the liquidation of the securities underlying the repurchase agreement and may
also incur liquidation costs. The funds, however, intend to enter into
repurchase agreements only with banks or broker-dealers that are considered
creditworthy (i.e., banks or broker-dealers that have been determined by the
funds' manager to present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction).
REVERSE REPURCHASE AGREEMENTS. The Global Fund may also enter into reverse
repurchase agreements, which are the opposite of repurchase agreements but
involve similar mechanics and risks. The Global 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 Global 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
Global Fund to experience a loss or delay in the liquidation costs. The Global
Fund intends to enter into reverse repurchase agreements with domestic or
foreign banks or securities dealers. The manager will evaluate the
creditworthiness of these entities prior to engaging in such transactions, under
the general supervision of the fund's Board.
BORROWING The Global 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. The Global Fund will not make new investments
while any outstanding borrowings exceed 5% of its total assets. The
Short-Intermediate 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.
ILLIQUID INVESTMENTS Each 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.
Illiquid investments include, 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 each fund's total net assets.
Notwithstanding this limitation, the Board has authorized each fund to invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933, as amended (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 the 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 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 the manager to treat a restricted
security as a liquid security on an ongoing basis, including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, the manager and the Board will take into account the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent a fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the 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.
CURRENCY TECHNIQUES AND HEDGING The Global Fund may invest in options, futures,
options on futures, and forward contracts, although the fund has no present
intention of using any of these techniques except forward contracts. 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 Global Fund may enter into forward
currency exchange contracts (forward contracts) 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 that 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. Similarly, 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 the manager, impede portfolio management or the ability
of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.
The Board has adopted the requirement that the Global Fund may only use futures
contracts and options on futures contracts for hedging purposes and not for
speculation. In addition, the Global 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.
OPTIONS ON FOREIGN CURRENCIES. The Global 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.
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.
DERIVATIVE SECURITIES Although the Global Fund has no present intention of
investing in the following types of securities, the fund may invest in the
securities described below. These securities are generally considered
"derivative securities."
OPTIONS. Although the Global Fund's present policy, which may be changed
without shareholder approval, is not to invest in options on securities, the
fund may 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.
The risks of the Global Fund's transactions in options on foreign exchanges are
similar to the risks of investing in foreign securities. In addition, a foreign
exchange may impose different exercise and settlement terms, procedures, and
margin requirements than an U.S. exchange.
The Global 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 Global 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 any benefit the
Global Fund may realize upon exercise of the option. Unless the price of the
underlying security rises sufficiently, the option may expire resulting in a
loss to the Global Fund equal to the cost of the options.
The ability of the Global Fund to engage in options transactions is subject
to the following limitations: a) the fund may not invest more than 5% of its
total assets 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
fund's net assets; and c) the aggregate premiums on all options purchased by
the fund may not exceed 20% of its net assets.
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.
When the fund writes or sells covered call options, it will receive a cash
premium which can be used in whatever way is felt to be most beneficial to the
fund. The 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.
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 that are
purchased subject to a put, thereby increasing the cost of the securities and
reducing the yield otherwise available from the same securities.
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. 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. If the Global 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. However, a writer or holder of an option may not effect a closing
transaction after being notified of the exercise of the option.
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.
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. There is no guarantee in any particular situation that either
a closing purchase or a closing sale transaction can be effected. 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 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.
There is no assurance that a liquid market will exist for a given option at any
particular time. 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. However, 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.
The Global 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.
INTEREST RATE SWAPS. The Global 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.
Interest rate swaps permit a party seeking a floating rate obligation 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 to acquire the
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.
FUTURES CONTRACTS. The Global 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.
The Global 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, GNMA
modified pass-through mortgage-backed securities, and three-month U.S. Treasury
bills. The Global 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.
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 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 Global Fund
will incur brokerage fees when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash (securities) or foreign currency
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets are
subject to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash (securities) or foreign currency and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by the manager may still not result in a successful hedging transaction.
OPTIONS ON FUTURES CONTRACTS. The Global 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 Global 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 Global 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 Global 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
Global 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 Global 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 Global 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 Global Fund will be able to use these instruments effectively for
the purposes set forth above. Furthermore, the Global Fund's ability to engage
in options on futures transactions may be limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES. The Global 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.
As with other types of options, however, the benefit the Global 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 Global 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 Global Fund may also write options on foreign currencies for hedging
purposes. 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 Global 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 Global 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.
The Global 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 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.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Global 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. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
8. Invest in interests in oil, gas or other mineral exploration or development
programs.
9. Invest in companies for the purpose of exercising control or management.
10. 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.
The Global Fund presently has the following additional restrictions, which are
not fundamental and may be changed without shareholder approval.
The Global Fund may not:
1. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
2. Purchase securities of other investment companies.
3. 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.
The Short-Intermediate 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 that 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.
The Global Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
funds intend to sell such investments as soon as practicable while maximizing
the return to shareholders.
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.
RISKS
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LOWER RATED SECURITIES Because the Global Fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Global Fund invests. Accordingly, an investment in the Global 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.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the unavailability of
additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Global Fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities tend
to lose much of their value before they default. Thus, the Global Fund's net
asset value may be adversely affected before an issuer defaults. In addition,
the Global Fund may incur additional expenses if it must try to recover
principal or interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more difficult
for a fund to manage the timing of its income. To generate cash to satisfy these
distribution requirements, the Global Fund may have to sell portfolio securities
that it otherwise may have continued to hold or use cash flows from other
sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Global Fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Global Fund
portfolio.
The Global Fund may buy high yield, 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 Global 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 Global Fund may also incur special costs
in disposing of restricted securities, although the Global Fund will generally
not incur any costs when the issuer is responsible for registering the
securities.
The Global Fund may buy high yield, 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 Global Fund does not have an 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 before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Global Fund's net asset
value.
The Global Fund relies on the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, and regulatory matters.
The table below shows the percentage of the Global Fund's assets invested in
securities rated by S&P or Moody's in the rating categories shown. A credit
rating by a rating agency evaluates the safety of principal and interest based
on an evaluation of the security's credit quality, but does not consider the
market risk or the risk of fluctuation in the price of the security. The
information shown is 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, 1998.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
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AAA ........................................ 80.0%
BB+ ........................................ 0.5%
BB ......................................... 10.7%
BB- ........................................ 4.9%
B+ ......................................... 2.7%
B 1......................................... 2.4%
CCC+ ....................................... 0.8%
1. 0.7% are unrated and have been included in the B rating category.
NON-DIVERSIFICATION RISK Because the Global Fund is non-diversified, there is no
restriction on the percentage of its assets that it may invest at any time in
the securities of any issuer. Nevertheless, the Global 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 invest a larger
portion of its assets in securities of a small number of issuers.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), restrictions on removal of assets, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
Certain countries' financial markets and services are less developed than those
in the U.S. or other major economies. Settlement practices may be cumbersome and
result in delays that may affect portfolio liquidity. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies, and obtaining judgments with respect to foreign investments in foreign
courts than with respect to domestic issuers in U.S.
courts.
The Global Fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the fund's
ability to meet a large number of shareholder redemption requests in the event
of economic or political turmoil in a country in which the fund has a
substantial portion of its assets invested or deterioration in relations between
the U.S. and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict the fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (viii) foreign taxation; (ix)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (x)
the absence of a capital market structure or market-oriented economy; and (xi)
the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events.
In addition, many countries in which the Global Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
CURRENCY The Global Fund's management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread in currency
exchange (to cover service charges) may be incurred, particularly when the fund
changes investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source.
The Global Fund may be affected either unfavorably or favorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Certain
currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Global Fund's portfolio
securities are denominated may have a detrimental impact on the fund. The fund's
manager endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where, from time to time, it places
the fund's investments.
Any investments by the Global Fund 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 tax laws and laws limiting the amount
and types of foreign investments. Although current regulations do not, in the
opinion of the fund's manager, limit seriously the fund's investment activities,
if they were changed in the future they might restrict the ability of the fund
to make its investments or tend to impair the liquidity of the fund's
investments. Changes in governmental administrations, economic or monetary
policies in the U.S. or abroad, or circumstances in dealings between nations
could result in investment losses for the fund and could adversely affect the
fund's operations.
The fund's Board of Directors (Board) considers at least annually the likelihood
of the imposition by any foreign government of exchange control restrictions
that would affect the liquidity of the Global Fund's assets maintained with
custodians in foreign countries, as well as the degree of risk from political
acts of foreign governments to which such assets may be exposed. The Board also
considers the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith, or gross negligence on the part of
the fund's manager, any losses resulting from the holding of the Global Fund's
portfolio securities in foreign countries and/or with securities depositories
will be at the risk of the shareholders. No assurance can be given that the
Board's appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments might not occur.
The Global 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
Global Fund's assets denominated in the foreign currency. These changes will
also affect the Global Fund's yield, income, and distributions to shareholders.
In addition, although the Global 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 Global
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 Global 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 Global 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.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the funds, the funds' manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
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). Debt obligations 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, a fund's
performance may be affected by the manager's ability to anticipate and respond
to fluctuations in market interest rates, to the extent of the fund's investment
in debt obligations.
OPTIONS ON 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 a 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 Global 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. The Global Fund may use out-of-the-money,
at-the-money, and in-the-money put options in the same market environments in
which it uses call options in equivalent buy-and-write transactions.
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 Global 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, 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 Global Fund's option trading activities, it intends to comply
with the California Corporate Securities Rules as they pertain to prohibited
investments.
The Global 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 Global
Fund believes that the use of futures contracts will benefit the fund, if the
manager's investment judgment about the general direction of interest or
currency exchange rates is incorrect, the fund's overall performance would be
poorer than if it had not entered into any such contract. For example, if the
Global 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 Global 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 Global 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 that reflect the rising
market. The Global 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 Global 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 Global 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.
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 Global Fund to use forward contracts
could be restricted to the extent that Congress authorizes 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 are 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 Global 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.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible 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 trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
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Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Edward B. Jamieson (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
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 or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Director, Quarterdeck Corporation (software
firm) and Digital Transmission Systems, Inc. (wireless communications); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, Fischer Imaging
Corporation (medical imaging systems) and General Partner, Peregrine Associates,
which was the General Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities Dealers,
Inc.
*Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
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Frank H. Abbott, III $17,410 $165,937 27
Harris J. Ashton 17,264 344,642 49
S. Joseph Fortunato 16,946 361,562 51
Edith E. Holiday 12,925 72,875 25
Frank W. T. LaHaye 18,010 141,433 27
Gordon S. Macklin 17,264 337,292 49
1. For the fiscal year ended October 31, 1998. During the period from October
31, 1997, through May 31, 1998, fees at the rate of $925 per month plus $925 per
board meeting attended were in effect.
2. For the calendar year ended December 31, 1997.
3. 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 54 registered investment companies, with approximately 168 U.S. based
funds or series.
Noninterested board members 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 or trustee. 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 Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
The manager is wholly owned by Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may 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 by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) 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.
The Global Fund's sub-advisor is Templeton Investment Counsel, Inc. The
sub-advisor has an agreement with the manager and provides the manager with
investment management advice and assistance. The sub-advisor furnishes, subject
to the manager's discretion, a portion of the investment advisory services for
which the manager is responsible pursuant to the management agreement. These
responsibilities may include managing a portion of the Global Fund's investments
and supplying research services. The sub-advisor's activities are subject to the
board's review and control, as well as the manager's instruction and
supervision.
MANAGEMENT FEES The fund pays the manager a fee equal to a monthly rate of:
o 5/96% of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over $250
million; and
o 9/240 of 1% of the value of net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the fund paid the following
management fees:
Management Fees Paid ($)
- ------------------------------------------------------------------------------
1998 1997 1996
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Global Fund .................. 722,502 785,629 866,730
Short-Intermediate Fund....... 1,118,373 1,076,296 1,142,250
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.35% of the average monthly net assets up to and including $100 million;
o 0.25% of the average monthly net assets over $100 million and not over
$250 million; and
o 0.20% of the average monthly net assets in excess of $250 million.
The manager pays this fee from the management fees it receives from the Global
Fund. For the last three fiscal years ended October 31, the manager paid the
following sub-advisory fees:
Sub-Advisory Fees Paid ($)
- -------------------------------------------------
1998 398,702
1997 428,496
1996 473,601
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended October 31, the manager paid FT Services
the following administration fees:
Administration Fees Paid ($)
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Global Fund .................. 179,253 215,869
Short-Intermediate Fund....... 296,460 310,121
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The fund
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
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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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager 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, the manager 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, 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 Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the
manager, 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 may improve execution and reduce transaction costs to the
fund.
During the fiscal years ended October 31, 1998, 1997 and 1996, the fund did not
pay any brokerage commissions.
As of October 31, 1998, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in any distribution and service (Rule 12b-1) fees of each class.
The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of and other income on its investments. This income, less expenses incurred
in the operation of the fund, constitutes the fund's net investment income from
which dividends may be paid to you. Any distributions by the fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS. If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
the fund. In so doing, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the Global Fund's and the
Short-Intermediate Fund's income consists of interest rather than dividends, no
portion of its distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the fund for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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The Global Fund is a nondiversified series, and the Short-Intermediate Fund is a
diversified series of Franklin Investors Securities Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Massachusetts business trust on December 22, 1986, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
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 that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The Global Fund currently offers three classes of shares, Class A, Class C and
Advisor Class. The Short-Intermediate Fund currently offers two classes of
shares, Class A and Advisor Class. Before January 1, 1999, Class A shares were
designated Class I and Class C shares were designated Class II. Each fund may
offer additional classes of shares in the future. The full title of each class
is:
o Franklin Global Government Income Fund - Class A
o Franklin Global Government Income Fund - Class C
o Franklin Global Government Income Fund - Advisor Class
o Franklin Short-Intermediate U.S. Government Securities Fund - Class A
o Franklin Short-Intermediate U.S. Government Securities Fund - Advisor
Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting may also be called by the board in its discretion.
As of December 7, 1998, the principal shareholders of the fund, beneficial or of
record, were:
Name and Address Share Class Percentage (%)
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GLOBAL FUND
Franklin Templeton Trust Company1
As Trustee for ValuSelect
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 Advisor Class 77.39
SHORT-INTERMEDIATE FUND
City of Scottsdale
Attn: Mark Kochman
3939 Civic Center Blvd.
Scottsdale, AZ 85251-4433 Class A 11.66
SHORT-INTERMEDIATE FUND
Templeton Funds Trust Company2
Attn: Vickie Nuzzo
100 Fountain Pky.
St. Petersburg, FL 33716-1205 Advisor Class 62.11
Franklin Templeton Trust Company1
Trust Services FBO
Harris J. Ashton IRA R/O
P.O. Box 7519
San Mateo, CA 94403-7519 Advisor Class 28.47
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
2. Templeton Funds Trust Company is a Florida corporation and is wholly owned by
Franklin Resources, Inc.
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 of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially 28% of the Short-Intermediate Fund - Advisor Class and
less than 1% of the outstanding shares of the other funds and classes. The board
members may own shares in other funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION 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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE For the Global Fund, if you request the exchange of the total
value of your account, declared but unpaid income dividends and capital gain
distributions will be reinvested in the fund and exchanged into the new fund at
net asset value when paid. For the Short-Intermediate Fund, 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. 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. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
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 U.S. Securities and Exchange
Commission (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.
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 and to send the certificate and assignment form in separate
envelopes.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
the prospectus.
Franklin Templeton Investor Services, Inc. (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.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The Global Fund values portfolio securities underlying actively traded call
options at their market price as determined above. The current market value of
any option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last sale
price is outside the bid and ask prices, the fund values options within the
range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
For the Global Fund, 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 fund's NAV is not calculated. Thus,
the calculation of the fund's NAV 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 close of the NYSE. The value of these securities used in computing the NAV
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 close of the NYSE that will not be reflected in the computation of the NAV.
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 use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
PERFORMANCE
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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.
For periods before January 2, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the relevant
time period, excluding the effect of Class A's maximum initial sales charge, and
including the effect of the distribution and service (Rule 12b-1) fees
applicable to the fund's Class A shares. For periods after January 2, 1997,
Advisor Class standardized performance quotations are calculated as described
below.
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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below 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 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 initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended October 31,
1998, were:
1 Year 5 Years 10 Years
- --------------------------------------------------------------
Advisor Class
Global Fund 5.81% 5.62% 7.73%
Short-Intermediate Fund 7.38% 4.98% 7.04%
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 each period at the end of each period
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, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total returns for the indicated periods ended
October 31, 1998, were:
1 Year 5 Years 10 Years
- --------------------------------------------------------------
Advisor Class
Global Fund 5.81% 31.61% 101.62%
Short-Intermediate Fund 7.38% 27.52% 97.52%
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 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 yields
for the 30-day period ended October 31, 1998, were:
Yield
- -------------------------------------------
ADVISOR CLASS
Global Fund 5.64%
Short-Intermediate Fund 3.91%
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. 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 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 rates for the 30-day period ended October 31, 1998, were:
Distribution Rate
- ----------------------------------------------------
Advisor Class
Global Fund 7.41%
Short-Intermediate Fund 5.27%
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 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 goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 goal, 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:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines provide
performance statistics over specified time periods.
o 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.
o 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.
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Lehman Brothers Aggregate Bond Index or its component indices measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Other taxable investments including CDs, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, and
repurchase agreements.
o 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 IBC's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.
o Salomon Brothers World Government Bond Index, or its component indices. The
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.
o 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 certificates of deposit (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 is one of the
oldest mutual fund organizations and now services more than 3 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, a pioneer in international investing. The Mutual Series team,
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 $216 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
DESCRIPTION OF BOND RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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 that 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. These
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. These 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 that are speculative to a high degree.
These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN INVESTORS SECURITY TRUST
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
FRANKLIN BOND FUND
CLASS A
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated March 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
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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.
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GOALS AND STRATEGIES
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ADJUSTABLE U.S. GOVERNMENT FUND The fund's investment goal is to seek a high
level of current income, consistent with lower volatility of principal. The
investment objective of the fund is fundamental, which means that it may not be
changed without shareholder approval. The fund seeks to achieve its goal by
investing all of its assets in shares of U.S. Government Adjustable Rate
Mortgage Portfolio ("Mortgage Portfolio").
Mortgage Portfolio has the same investment goal and substantially similar
investment policies as the fund, except, in all cases, the fund may pursue its
policies by investing in an open-end management investment company with the same
investment goal and substantially similar policies and restrictions as the fund.
The investment goal of Mortgage Portfolio is fundamental, which means that it
may not be changed without shareholder approval. The fund buys shares of
Mortgage Portfolio at net asset value. An investment in the fund is an indirect
investment in Mortgage Portfolio.
The Mortgage Portfolio seeks 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") and having interest rates that reset at
periodic intervals. The Mortgage Portfolio will only invest in mortgage
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
ADJUSTABLE RATE SECURITIES FUND The fund's investment goal is to seek a high
level of current income, consistent with lower volatility of principal. The
investment goal of the fund is fundamental, which means that it may not be
changed without shareholder approval. The fund seeks to achieve its goal by
investing all of its assets in shares of Adjustable Rate Securities Portfolio
("Securities Portfolio").
Securities Portfolio has the same investment goal and substantially similar
investment policies as the fund, except, in all cases, the fund may pursue its
policies by investing in an open-end management investment company with the same
investment goal and substantially similar policies and restrictions as the fund.
The investment goal of Securities Portfolio is fundamental, which means that it
may not be changed without shareholder approval. The fund buys shares of
Securities Portfolio at net asset value. An investment in the fund is an
indirect investment in Securities Portfolio.
The Securities Portfolio seeks 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 (collectively, "mortgage securities"),
including 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 Securities 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 Securities Portfolio's investment objective. Privately
issued mortgage securities are generally structured with one or more types of
credit enhancement. The Securities 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 Securities Portfolio may also invest in unrated securities
if the manager determines that they are of comparable quality to the ratings
above.
Mortgage Portfolio and Securities Portfolio may individually or together be
referred to as the "Portfolio(s)". The Portfolios are series of the Adjustable
Rate Securities Portfolios.
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; and (d) with respect to the Securities Portfolio, asset-backed and
mortgage-backed securities issued by private and government entities. The
Securities Portfolio may invest in fixed-rate or adjustable-rate securities. The
Portfolio's investments 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.
Each of the fund's and the corresponding Portfolio's policies and restrictions
discussed in the Prospectus and in this SAI is considered at the time the fund
makes an investment. The fund and the Portfolio are generally not required to
sell a security because of a change in circumstances.
The Portfolio may invest without limit in obligations of the U.S. government
or of corporations chartered by Congress as federal government
instrumentalities. The Portfolio 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"). GNMA guarantees are
backed by the full faith and credit of the U.S. Treasury. No assurances,
however, can be given that the U.S. government will provide financial support
to the obligations of other U.S. government agencies or instrumentalities in
which the Portfolio may invest. Securities issued by these agencies and
instrumentalities are supported by 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 buy certain obligations of
an agency or instrumentality, or the credit of the agency or instrumentality.
Several of the Franklin Templeton Funds, including the Portfolio, are major
buyers of government securities. The manager will seek to negotiate attractive
prices for government securities and pass on any savings from these negotiations
to shareholders in the form of higher current yields.
BOND FUND The fund's principal investment goal is to provide a high level of
current income consistent with the preservation of capital. Its secondary goal
is capital appreciation over the long term. These goals are fundamental, which
means they may not be changed without shareholder approval.
The fund tries to achieve its investment goal by investing at least 65% of its
total assets in investment grade fixed-income securities, including debt
securities and mortgage-backed and asset-backed securities. Up to 35% of the
fund's total assets may be invested in non-investment grade fixed-income
securities.
The following describes the various types of securities Mortgage Portfolio and
Securities Portfolio may buy.
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, Federal National Mortgage Association ("FNMA"), and Federal
Home Loan Mortgage Corporation ("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.
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, 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 they issue 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.
The Securities 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
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 Securities Portfolio's quality standards. The
Securities Portfolio may buy mortgage securities without insurance or guarantees
if, through an examination of the loan experience and practices of the poolers,
the manager determines that the securities meet the Securities 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.
ARMS ARMS, like traditional mortgage securities, are interests in pools of
mortgage loans. The interest rates on the mortgages underlying ARMS are reset
periodically. 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 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 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 extreme fluctuation in
interest rates, however, the Portfolio's and thus the Fund's net asset value
will fluctuate.
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. 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. 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. 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.
Please keep in mind that 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 market rates. Also, the Portfolio's net asset value could
vary to the extent that current yields on mortgage-backed securities are
different from market yields during interim periods between coupon reset dates.
A portion of the ARMS in which the Portfolio may invest may not reset for up to
five years.
During periods of declining interest rates, 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 prepayments of
mortgages, and the Fund may have to reinvest the proceeds from the prepayments
at the lower prevailing interest rates.
For certain types of ARMS, the rate of amortization of principal, as well as
interest payments, change 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 Securities
Portfolio may invest in them if they are consistent with the Securities
Portfolio's objective, policies, and quality standards.
ADJUSTABLE RATE SECURITIES ("ARS") The Securities 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. Movements in the
relevant index, as well as the applicable spread relating to the ARS, will
affect the interest paid on ARS and, therefore, the current income earned by the
Securities Portfolio by investing in ARS. (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 Securities Portfolio and of the net asset value of
the Securities Portfolio's and thus the Adjustable Rate Securities 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 Securities Portfolio does not seek to maintain an
overall average cap or floor, although the manager will consider caps or floors
in selecting ARS for the Securities Portfolio.
While the Securities 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 Securities Portfolio, the
fluctuation in market value of the ARS held by the Securities Portfolio is
expected to be relatively limited, since the interest rates on the ARS 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 Securities Portfolio's
holdings may fluctuate more substantially because the caps and floors of its ARS
may not permit the interest rates to adjust to the full extent of the movements
in the market 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 Securities Portfolio's and thus the Adjustable Rate
Securities Fund's net asset value.
CMOS, REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS") AND MULTI-CLASS
PASS-THROUGHS The Portfolio may invest in CMOs issued and guaranteed by U.S.
government agencies or instrumentalities. The Securities Portfolio may also
invest in REMICs issued and guaranteed by U.S. government agencies and
instrumentalities, in CMOs and REMICs issued by certain financial institutions
and other mortgage lenders, and in multi-class pass-through securities. Mortgage
Portfolio will not invest in privately issued CMOs and REMICs except to the
extent that it invests in the securities of entities that are instrumentalities
of the U.S. government.
CMOs and REMICs may be issued by governmental or government-related entities or
by private entities such as banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers, and other secondary market
issuers and are secured by pools of mortgages backed by residential or various
types of commercial properties. Privately issued CMOs and REMICs include
obligations issued by private entities that are collateralized by (a) mortgage
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association, 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.
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.
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 predict more accurately the pace at which principal is returned.
The Mortgage Portfolio may buy CMOs that are:
(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.
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 Securities 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 Adjustable
Rate Securities Portfolios believe that the risk of loss to the Securities
Portfolio relating to its investments in privately issued CMOs is justified by
the higher yield the Securities Portfolio will earn in light of the historic
loss experience on these instruments. The Securities 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 not guaranteed by any government agency or
instrumentality.
The manager currently intends to limit the Securities 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 Securities 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 Securities 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 Securities
Portfolio invests are considered by the SEC to be investment companies, the
Securities 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 used 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 borrower may change up or down (a) per reset or adjustment interval
and (b) 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 Securities Portfolio may invest in stripped
mortgage securities, which are derivative multi-class mortgage securities. The
stripped mortgage securities in which the Securities 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 Securities 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
Securities Portfolio. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Securities Portfolio may fail to
recoup its initial investment fully, 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 Securities Portfolio, through several investment banking firms
acting as brokers or dealers. These securities were only recently developed, and
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 Adjustable Rate Securities Portfolios may,
in the future, adopt procedures that would permit the Securities 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 Securities 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.
ASSET-BACKED SECURITIES Securities 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
Securities 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.
The rate of principal payment on asset-backed securities generally depends on
the rate of principal payments received on the underlying assets. The payment
rate may be affected by various economic and 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 underlying assets, how well the issuers of the securities
are insulated from the credit risk of the originator or affiliated entities, and
the amount of credit support provided to the securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on the underlying assets to make payments, asset-backed securities
may contain elements of credit support. Credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses from the
default by an obligor on the underlying assets. Liquidity protection refers to
advances, generally provided 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 from the default by an obligor 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. 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 that are subordinate to the other classes with respect 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 "over-collateralization" (where the scheduled payments on,
or the principal amount of, the underlying assets exceeds that required to make
payments on the securities and pay any servicing or other fees). The degree of
credit support provided 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 securities.
FLOATERS 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 of short-term interest rates and move
at an accelerated speed. Securities Portfolio may also invest up to 5% of its
total assets in super floaters. Super floaters 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.
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 sale 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.
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, each Portfolio may invest in
CMOs and uncovered mortgage dollar rolls, and the Securities Portfolio may also
invest in REMICs, 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, to increase liquidity, and/or to invest in a particular instrument in a
more efficient or less expensive way. The Portfolio will not necessarily use
these instruments or investment strategies to the full extent permitted unless
the manager believes that doing so will help the Portfolio achieve its
objective, and the Portfolio will not use all instruments or strategies at all
times.
CASH AND CASH EQUIVALENTS The Portfolio may retain its underlying assets in cash
and cash equivalents, including Treasury bills, commercial paper, and short-term
bank obligations such as CDs, bankers' acceptances, and repurchase agreements.
The Portfolio intends, however, to retain in cash only as much of its underlying
assets as is considered desirable or expedient under existing market conditions.
REPURCHASE AGREEMENTS In a repurchase agreement, the fund buys U.S. government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. A
custodian bank approved by the fund's Board of Trustees holds the securities
subject to resale on behalf of the fund. The bank or broker-dealer must transfer
to the custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities at a
later date. The securities are then marked to market daily to maintain coverage
of at least 100%. If the bank or broker-dealer does not repurchase the
securities as agreed, the fund may experience a loss or delay in the liquidation
of the securities underlying the repurchase agreement and may also incur
liquidation costs. The fund, however, intends to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy
(I.E., banks or broker-dealers that have been determined by the fund's manager
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction). Please see "Risks
Repurchase agreement risk" below for more information.
LOANS OF PORTFOLIO SECURITIES Consistent with procedures approved by the Board
of Trustees of the Trust and subject to the following conditions, the fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors, if such loans do not exceed 10% of the value of the
fund's total assets at the time of the most recent loan. Such loans must be
secured by collateral (consisting of any combination of cash, U.S. government
securities or irrevocable letters of credit) in an amount equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
The fund retains all or a portion of the interest received on the investment of
the cash collateral or receive a fee from the borrower. The fund will continue
to receive any interest or dividends paid on any loaned securities and will
continue to have voting rights with respect to the securities. However, as with
other extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS The Portfolio may buy U.S.
government obligations (or any securities in the case of the Securities
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 acquiring the securities, it may sell the securities
before the settlement date if the Portfolio deems it to be 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 does 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
generally do not 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.
BORROWING The Securities 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 Securities 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 Securities 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 Securities
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 Securities Portfolio leverages its assets, the Securities
Portfolio's net asset value may increase or decrease at a greater rate than if
the Securities Portfolio were not leveraged. The interest payable on the amount
borrowed increases the Securities Portfolio's expenses (and thus reduces the
income to the Adjustable Rate Securities Fund), and if the appreciation and
income produced by the investments purchased with the borrowings do not exceed
the cost of the borrowing, leveraging may reduce the investment performance of
the Securities Portfolio.
The fund may not borrow money nor mortgage nor 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 the fund's total asset
value.
ILLIQUID INVESTMENTS The Portfolio'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 Portfolio has valued them.
MASTER/FEEDER FUND STRUCTURE The fund's structure, whereby it invests all of its
assets in the corresponding Portfolio, is sometimes known as a "Master/Feeder
Fund Structure." This is a relatively new format that often results in certain
operational and other complexities. The Franklin Templeton organization was one
of the first mutual fund complexes in the country to implement this structure,
and the Board of Trustees of the Trust 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 corresponding Portfolio was
previously approved by shareholders of the fund. Whenever the fund, as an
investor in the corresponding 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 that invests in Mortgage
Portfolio and one other that invests in Securities Portfolio. They are designed
for institutional investors only. 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 Adjustable Rate Securities Portfolios,
an open-end management investment company. Adjustable Rate Securities Portfolios
was organized as a Delaware business trust on February 15, 1991, and is
registered with the SEC. 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.
The following describes the various types of securities the Bond Fund may buy.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances. A
debt security typically has a fixed payment schedule which obligates the issuer
to pay interest to the lender and to return the lender's money over a certain
time period. A company typically meets its payment obligations associated with
its outstanding debt securities before it declares and pays any dividend to
holders of its equity securities. Bonds, notes, debentures and commercial paper
differ in the length of the issuer's payment schedule, with bonds carrying the
longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
MORTGAGE-BACKED SECURITIES represent an ownership interest in mortgage loans
made by banks and other financial institutions to finance purchases of homes,
commercial buildings or other real estate. These mortgage loans may have either
fixed or adjustable interest rates. The individual mortgage loans are packaged
or "pooled" together for sale to investors. As the underlying mortgage loans are
paid off, investors receive principal and interest payments.
The fund may invest in mortgage-backed securities issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"),
as well as mortgage-backed securities issued or guaranteed by foreign
governments or governmental agencies or by private institutions.
A mortgage-backed security is an interest in a pool of mortgage loans. The
primary issuers or guarantors of these securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage-backed 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 backed by the full faith
and credit of the U.S. government. Mortgage securities from 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
would 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, these securities are
generally considered to be high quality investments having minimal credit risks.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly 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. The fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage-backed securities nor do they extend to the value
of the fund's shares. In general, the value of fixed-income securities varies
with changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas coupon rates
of adjustable rate mortgage securities move with market interest rates, and thus
their value tends to fluctuate to a lesser degree. In view of these factors, the
ability of the fund to obtain a high level of total return may be limited under
varying market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS") AND MULTI-CLASS PASS-THROUGHS. The fund may invest in
certain debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities. These obligations may be issued or guaranteed by U.S.
government agencies or issued by certain financial institutions and other
mortgage lenders. CMOs and REMICs are debt instruments issued by special purpose
entities and are secured by pools of mortgages backed by residential and various
types of commercial properties. 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 debt service on the CMO or REMIC or make scheduled
distributions on the multi-class pass-through securities.
CMOs are collateralized by pools of mortgage loans created by commercial banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other issuers in the U.S. Timely payment of interest and principal
(but not the market value and yield) of some of these pools is supported by
various forms of insurance or guarantees issued by private issuers, those who
pool the mortgage assets and, in some cases, by U.S. government agencies.
Prepayments of the mortgages underlying a CMO, which usually increase when
interest rates decrease, will generally reduce the life of the mortgage pool,
thus impacting the CMO's yield. Under these circumstances, the reinvestment of
prepayments will generally be at a rate lower than the rate applicable to the
original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, 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 a CMO, however, may cause
it to be retired substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of a CMO on a
monthly, quarterly or semiannual basis. The principal and interest on the
underlying mortgages may be allocated among several classes of a series in many
ways. In a common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the classes of a series
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Some of the CMOs in which the fund may
invest may be less liquid than other types of mortgage securities. A lack of
liquidity in the market for CMOs could result in the fund's inability to dispose
of such securities at an advantageous price under certain circumstances.
To the extent any privately issued CMOs in which the fund invests are considered
by the SEC to be an investment company, the fund will limit its investments in
such securities in a manner consistent with the provisions of the 1940 Act.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the mortgages that collateralize
the REMICs in which the fund may invest include mortgages backed by GNMAs or
other mortgage pass-throughs issued or guaranteed by the U.S. government, its
agencies or instrumentalities or issued by private entities, which are not
guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields
on CMOs issued or guaranteed by U.S. government agencies. However, the risk
of loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government.
STRIPPED MORTGAGE-BACKED SECURITIES. The fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available from
fixed-rate mortgage securities. The stripped mortgage-backed securities in which
the fund may invest will not be limited to those issued or guaranteed by
agencies or instrumentalities of the U.S. government, although such securities
are more liquid than privately issued stripped mortgage-backed securities.
Stripped mortgage-backed securities are usually structured with two classes,
each receiving different proportions of the interest and principal distributions
on a pool of mortgage assets. Typically, one class will receive some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity of an IO and
PO class is extremely sensitive not only to changes in prevailing interest rates
but also to the rate of principal payments (including prepayments) on the
related underlying mortgage assets.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests and are purchased and
sold by institutional investors, such as the fund, through several investment
banking firms acting as brokers or dealers. 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 of trustees. The board of trustees may, in the future, adopt
procedures that would permit the fund to acquire, hold, and treat as liquid
government-issued IO and PO securities. At the present time, however, all such
securities will be treated as illiquid and will, together with any other
illiquid investments, not exceed 15% of the fund's net assets. This position may
be changed in the future, without notice to shareholders, in response to the
staff's continued reassessment of this matter, as well as to changing market
conditions.
As new types of mortgage-backed securities are developed and offered to
investors, the fund may invest in them if they are consistent with the fund's
objectives, policies and quality standards.
OTHER STRUCTURED INVESTMENTS. In addition to CMOs and stripped mortgage-backed
securities, the fund may invest in other structured investments such as
collateralized loan obligations and collateralized bond obligations. These
securities typically are issued in one or more classes that are backed by or
represent an interest in certain underlying instruments with the cash flows on
the underlying instruments apportioned among the classes to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions. The fund may invest in structured
investments that are either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured investments typically have
higher yields and present greater risks than unsubordinated structured
investments. Although the fund's purchase of subordinated structured investments
would have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of the
limitations placed on the extent of the fund's assets that may be used for
borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the fund's investment in
these structured investments may be limited by the restrictions contained in the
1940 Act. Structured investments are often sold in private placement
transactions. To the extent such investments are illiquid, they will be subject
to the fund's restrictions on investments in illiquid securities.
ADJUSTABLE RATE MORTGAGE SECURITIES. The fund may invest in adjustable rate
mortgage securities ("ARMs"). ARMs, like traditional mortgage-backed securities,
are an interest in a pool of mortgage loans and are issued or guaranteed by a
federal agency or by private issuers. Unlike fixed-rate mortgages, which
generally decline in value during periods of rising interest rates, the interest
rates on the mortgages underlying ARMs are reset periodically and thus allow the
fund to participate in increases in interest rates, resulting in both higher
current yields and lower price fluctuations. During periods of declining
interest rates, of course, the coupon rates may readjust downward, resulting in
lower current yields. Because of this feature, the value of an ARM is unlikely
to rise during periods of declining interest rates to the same extent as a
fixed-rate instrument. The rate of amortization of principal, as well as
interest payments, for certain types of ARMs change in accordance with movements
in a pre-specified, published interest rate index. There are several categories
of indices, including those based on U.S. Treasury securities, those derived
from a calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. The amount of interest due to an ARM
security 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. The interest rates paid on the ARMs in which the fund may invest are
generally readjusted at intervals of one year or less, although instruments with
longer resets such as three, five, seven and ten years are also permissible
investments.
The underlying mortgages that collateralize the ARMs in which the fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMs in the fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause the
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
ASSET-BACKED SECURITIES The fund may invest in asset-backed securities. The
assets underlying these securities may include, but are not limited to,
receivables on home equity and credit card loans, and automobile, mobile home
and recreational vehicle loans and leases. There may be other types of
asset-backed securities that are developed in the future in which the fund may
invest. Asset-backed securities are issued in either a pass-through structure
(similar to a mortgage pass-through structure) or in a pay-through structure
(similar to a CMO structure). In general, asset-backed securities contain
shorter maturities than bonds or mortgage loans. The rate of principal payment
on asset-backed securities generally depends on the rate of principal payments
received on the underlying assets. The payment rate may be affected by various
economic and 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 underlying assets, how well the issuers of the securities
are insulated from the credit risk of the originator or affiliated entities, and
the amount of credit support provided to the securities. Asset-backed securities
entail certain risks not presented by 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 the credit cards, thereby reducing the outstanding balance. In
the case of automobile receivables, there is a risk that the holders may not
have either a proper or first security interest in all of the obligations
backing such receivables due to the large number of vehicles involved in a
typical issuance and 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.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on the underlying assets to make payments, asset-backed securities
may contain elements of credit support. Credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses from the
default by an obligor on the underlying assets. Liquidity protection refers to
advances, generally provided 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 from the default by an obligor 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 fund 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 that are subordinate to the other classes with respect 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 "over-collateralization" (where the scheduled payments on,
or the principal amount of, the underlying assets exceeds that required to make
payments on the securities and pay any servicing or other fees). The degree of
credit support provided 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 securities.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS The fund may buy U.S. government
obligations on a "when issued" or "delayed delivery" basis. These transactions
are arrangements under which the fund buys securities that have been authorized
but not yet issued with payment for and delivery of the security scheduled for a
future time, generally in 30 to 60 days. Purchases of U.S. government securities
on a when issued or delayed delivery basis are subject to 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 U.S. government 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 fund is the buyer in this
type of 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 the fund's 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 its investment objectives and policies, and not for
the purpose of investment leverage. In when issued and delayed delivery
transactions, the fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the fund to miss a price or yield considered
advantageous to the fund. Securities purchased on a when issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. Entering into a when issued or delayed delivery transaction is a form of
leverage that may affect changes in net asset value to a greater extent.
MORTGAGE DOLLAR ROLLS The fund may enter into mortgage dollar rolls in which the
fund 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 period between
the sale and repurchase, the fund forgoes principal and interest paid on the
mortgage-backed securities. The fund is compensated by the difference between
the current sale price and the lower 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 mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The fund could suffer a loss if the contracting party fails
to perform the future transaction in that the fund may not be able to buy back
the mortgage-backed securities it initially sold. The fund intends to enter into
mortgage dollar rolls only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills, notes and bonds,
which are direct obligations of the U.S. government, backed by the full faith
and credit of the U.S. Treasury, and in securities issued or guaranteed by
federal agencies. The fund may also invest in securities issued or guaranteed by
foreign governments and their agencies.
DERIVATIVE SECURITIES Futures contracts, option transactions and foreign
currency exchange transactions are generally considered "derivative securities."
FUTURES CONTRACTS. The fund may enter into contracts for the purchase or sale
for future delivery of financial futures and foreign currency futures and
options on these contracts. Financial futures contracts are commodity contracts
that obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the securities 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 obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts 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.
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 different interest rates 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, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The termination of a contractual obligation is accomplished by
buying (or selling, as the case may be) on a commodities exchange an identical
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 securities. 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 buys 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 the market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund will be required to pay 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.
Generally, the purpose of the acquisition or sale of a futures contract is to
attempt to protect the fund from fluctuations in the price of portfolio
securities without actually buying or selling the underlying security, although
the fund may engage in futures and related options to earn additional income.
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 expects that interest rates may decline, the fund may
purchase futures contracts 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 and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market 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 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 distortion. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the manager may still not
result in a successful transaction.
OPTIONS ON FUTURES CONTRACTS. The fund may buy and sell (write) options on
futures contracts. 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.
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. The fund may lose the entire amount of the premium (plus related
transaction costs) paid for options it has purchased if the option expires
worthless. 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 reductions 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
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.
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. 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 same currency.
For example, an Italian lira-denominated position could be constructed by buying
a German mark-denominated debt security and simultaneously entering into a
Forward Contract to exchange an equal amount of marks for lira at a future date
and at a specified exchange rate. With such a transaction, the fund may be able
to receive a return that is substantially similar from a yield and currency
perspective to a direct investment in lira debt securities while achieving other
benefits from holding the underlying security. The fund may experience slightly
different results from its use of such combined investment positions as compared
to its purchase of a debt security denominated in the particular currency
subject to the Forward Contract. This difference may be enhanced or offset by
premiums that may be available in connection with the Forward Contract.
The fund may also enter into a Forward Contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
Forward Contract to sell an amount of that foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency; or when the fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
The fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable debt securities
equal to the amount of the purchase will be held in segregated accounts with the
fund's custodian bank to be used to pay for the commitment, or the fund will
cover any commitments under these contracts to sell currency by owning the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily.
SHORT SELLING In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. To complete the
transaction, the fund must borrow the security to make delivery to the buyer.
The fund is then obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. Until the security is replaced, the
fund must pay the lender any dividends or interest that accrues during the
period of the loan. To borrow the security, the fund may also be required to pay
a premium, which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
fund replaces the borrowed security, and the fund will realize a gain if the
security declines in price between those same dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the fund is required to pay in connection with
the short sale.
The fund will place in a segregated account with its custodian bank an amount
equal to the difference between (a) the market value of the securities sold
short at the time they were sold short and (b) any cash or securities required
to be deposited as collateral with the broker in connection with the short sale
(not including the proceeds from the short sale). The segregated account will be
marked-to-market daily and at no time will the amount deposited in the
segregated account and with the broker as collateral be less than the market
value of the securities at the time they sold short. Under amendments made by
the Revenue act of 1997, entering into a short sale could cause immediate
recognition of gain (but not loss) on the date the constructive sale of an
appreciated financial position is entered.
ILLIQUID AND RESTRICTED SECURITIES The fund may invest up to 15% of its net
assets in illiquid securities. Illiquid securities are 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 include, among other
things, repurchase agreements of more than seven days duration and other
securities which are not readily marketable. Investments in savings deposits are
generally considered illiquid and will, together with other illiquid
investments, not exceed 15% of the fund's total net assets. Notwithstanding this
limitation, 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,
as amended (the "1933 Act") ("restricted securities"), where such investment is
consistent with the fund's investment objective and the 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 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 of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the board of trustees
will take into account the following factors: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer). To the extent the fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.
SECURITIES LENDING The fund may lend to broker-dealers portfolio securities with
an aggregate market value up to 33 1/3% of its total assets. Such loans must be
secured by collateral (consisting of any combination of cash, U.S. government
securities or irrevocable letters of credit) in an amount at least equal (on a
daily marked-to-market basis) to the current market value of the securities
loaned. The fund may terminate the loans at any time and obtain the return of
the securities. The fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect to
the securities.
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements with
certain banks and broker-dealers. Under a repurchase agreement, the fund agrees
to buy a U.S. government security from one of these issuers and then to sell the
security back to the issuer after a short period of time (generally, less than
seven days) at a higher price. The bank or broker-dealer must transfer to the
fund's custodian, securities with an initial value of at least 102% of the
dollar amount invested by the fund in each repurchase agreement. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the fund's ability to
dispose of the underlying securities. The fund will enter into repurchase
agreements only with parties who meet creditworthiness standards approved by the
fund's board of trustees, i.e., banks or broker-dealers which have been
determined by the manager to present no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the repurchase
transaction.
BORROWING The fund does not borrow money, except that the fund may borrow for
temporary or emergency purposes in an amount not to exceed 30% of its total
assets (including the amount borrowed).
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase agreements
and other money market equivalents.
For information on the Fund's administrator and its expenses, please see
"Management and Other Services"
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. The fund may not:
The Adjustable U.S. Government Fund and Adjustable Rate Securities 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 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 the Portfolio are the same as the investment
restrictions of the fund, 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 SAI.
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 Advisers or its affiliates. (The fund's investment
restriction 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
33 1/3% 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 Advisers or its affiliates. (The fund's investment restriction in
this respect is stated in far more detail.)
The Adjustable U.S. Government Fund may also be subject to investment
limitations imposed by foreign jurisdictions in which the fund sells its shares.
The Bond Fund may not:
1. Borrow money, except that the fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
30% of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
objectives and policies, and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies, and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest. 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.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities).
7. Purchase the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities), if immediately after such investment
(a) more than 5% of the value of the fund's total assets would be invested in
such issuer or (b) more than 10% of the outstanding voting securities of such
issuer would be owned by the fund, except that up to 25% of the value of such
fund's total assets may be invested without regard to such 5% and 10%
limitations.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the funds, the funds may receive stock, real estate, or other
investments that the funds would not, or could not, buy. In this case, the funds
intend to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
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.
RISKS
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Mortgage Portfolio and Securities Portfolio:
INTEREST RATE RISK Changes in interest rates will affect the value of the
Portfolio's and thus the corresponding fund's portfolio and their 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 corresponding fund's shares. Interest rates have increased and decreased
in the past. These changes are unpredictable. To the extent the Portfolio
invests in fixed-rate securities, the value of the 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.
MORTGAGE SECURITIES RISK 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. An unexpected
rise in interest rates could extend the life of a mortgage security because of a
lower than expected level of prepayments, potentially reducing the security's
value and increasing its volatility. 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.
Some of the CMOs in which the Portfolio may invest may have less liquidity than
other types of mortgage securities. As a result, it may be difficult or
impossible to sell the securities at an advantageous price or time under certain
circumstances.
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 Securities
Portfolio's limit with respect to illiquid investments.
ADJUSTABLE RATE SECURITIES RISK ARS have several characteristics that you should
consider before investing in the Adjustable Rate Securities Fund. As indicated
above, the interest rate reset features of ARS held by the Securities Portfolio
will reduce the effect on the Securities Portfolio's net asset value per share
caused by changes in market interest rates. The market value of ARS and,
therefore, the Securities Portfolio's and the Adjustable Rate Securities 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 Securities Portfolio, the greater the potential for fluctuations in the
Securities Portfolio's and thus the Adjustable Rate Securities Fund's net asset
value.
As an investor in the Adjustable Rate Securities Fund, you will receive
increased income as a result of upward adjustments of the interest rates on ARS
held by the Securities Portfolio in response to market interest rates. The
Adjustable Rate Securities 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 Adjustable Rate
Securities Fund and its shareholders from an increase in the Securities
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
Securities Portfolio. The Adjustable Rate Securities Fund, therefore, is not
designed for investors seeking capital appreciation.
ASSET-BACKED SECURITIES RISK Asset-backed securities entail certain risks not
present with mortgage-backed securities, because 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.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or other laws, a court
may determine that the underlying security is collateral for a loan by the fund
not within the control of the fund, and therefore the realization by the fund on
the collateral may be automatically stayed. Finally, it is possible that the
fund may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement. While
the manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the fund, these risks can be
controlled through careful monitoring procedures.
MASTER/FEEDER FUND STRUCTURE RISK 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 shareholders in the Portfolio sell their shares, the corresponding
fund's expenses may increase or the economies of scale that have been achieved
as a result of the structure may diminish. Institutional investors in the
Portfolio that have a greater pro rata ownership interest in the Portfolio than
the corresponding fund could also have effective voting control over the
operation of the Portfolio. Furthermore, if the Portfolio changes its objective
or any of its fundamental policies and shareholders of the corresponding fund do
not approve the change for the fund, 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 of Trustees of the Trust considers it to be in the best interest of
the fund, the fund may withdraw its investment in the corresponding Portfolio at
any time. In that event, the Board of Trustees of the Trust would consider what
action to take, including the investment of all of the fund's assets 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.
Bond Fund:
There is no assurance that the fund will meet its investment goal. Investments
in securities that have potential to increase in value may be subject to a
greater degree of risk and may be more volatile than other types of investments.
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 market as a whole.
INTEREST RATE Because the fund invests primarily 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, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
MORTGAGE-BACKED SECURITIES The fund's investment in mortgage-backed securities
differs from conventional debt securities because principal is paid back over
the life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. During periods of declining
interest rates, the volume of principal prepayments generally increases as
borrowers refinance their mortgages at lower rates. The fund may be forced to
reinvest returned principal at lower interest rates, reducing the fund's income.
For this reason, mortgage-backed securities may be less effective than other
types of securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other investments with similar maturities. A reduction in the
anticipated rate of principal prepayments, especially during periods of rising
interest rates, may increase the effective maturity of mortgage-backed
securities, making them more susceptible than other debt securities to a decline
in market value when interest rates rise. This could increase the volatility of
the fund's returns and share price.
To the extent mortgage securities are purchased at a premium, unscheduled
principal prepayments, including prepayments resulting from mortgage
foreclosures, 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 you, will
be taxable as ordinary income.
FOREIGN SECURITIES You should consider carefully the substantial risks involved
in securities of companies of foreign nations, which are in addition to the
usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. A fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value. Foreign markets have
substantially less volume than the New York Stock Exchange ("NYSE"), and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign countries,
which are generally fixed rather than subject to negotiation as in the U.S., are
likely to be higher. In many foreign countries there is less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
CURRENCY The fund's management endeavors to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the fund.
Through the fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The board of trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The board of trustees also
considers the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith, or gross negligence on the part of
the manager, any losses resulting from the holding of the fund's portfolio
securities in foreign countries and/or with securities depositories will be at
the risk of the shareholders. No assurance can be given that the board of
trustees' appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments might not occur.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the fund, the fund's manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy or, the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish a fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for a fund
to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated dent securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities. The ability of a fund to achieve its investment goal
may, to the extent of investment in low rated debt securities, be more dependent
upon such creditworthiness analysis than would be the case if the fund were
invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, a fund may incur additional expenses to seek
recovery.
The risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, the fund will not receive any cash until the cash payment date. If the
issuer defaults, the fund may not obtain any return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face amount
or par value. The discount varies depending on the time remaining until maturity
or the cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality.
Current federal income tax law requires a holder of a zero-coupon security to
report as income each year the portion of original issue discount on the
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Pay-in-kind securities pay interest by
issuing more bonds. The fund is deemed to receive interest over the life of
these bonds and is treated as if the interest were paid on a current basis for
federal income tax purposes, although the fund does not receive any cash
interest payments until maturity or the cash payment date. Accordingly, during
times when the fund does not receive any cash interest payments on its
zero-coupon, deferred interest or pay-in-kind securities, it may have to sell
portfolio securities to meet distribution requirements and these sales may be
subject to the risk factors discussed above. The fund is not limited in the
amount of its assets that may be invested in these types of securities.
DERIVATIVE SECURITIES RISK
FUTURES CONTRACTS. Futures contracts entail risks. Although the fund believes
that use of such contracts will benefit the fund, if the manager's investment
judgment about pertinent market movements is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. Similarly, if the fund
sells a foreign currency futures contract and the U.S. dollar value of the
currency unexpectedly increases, the fund will lose the beneficial effect of 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
securities from its portfolio to meet daily variation margin requirements. These
sales may be, but will not necessarily be, 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.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in financial futures and related options also depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the fund's
portfolio. Inasmuch as these securities will not duplicate the components of any
index or underlying securities, the correlation will not be perfect.
Consequently, the fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Positions in financial futures and related options may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close a
futures or option position. The inability to close futures or options positions
could have an adverse impact on the fund's ability to effectively hedge its
securities. The fund will enter into a futures or option position only if there
appears to be a liquid secondary market for such futures or option.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The fund does not believe that these trading and positions limits
will have an adverse impact on the fund's futures strategies.
OPTIONS ON FUTURES. 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.
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 fund may enter into forward currency exchange contracts in order to limit
the risk from adverse changes in the relationship between currencies. However,
these 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.
The purchase and sale of exchange-traded foreign currency options are 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.
ADVANTAGES OF INVESTING IN THE ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AND
ADJUSTABLE RATE SECURITIES FUND The Adjustable U.S. Government Fund enables you
to invest easily in mortgage securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities with a low initial investment.
Similarly, the Adjustable Rate Securities 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 corresponding 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. The dividends from the Adjustable U.S. Government
Fund's net investment income are declared and distributed monthly. Some change
in the net asset value per share of the Adjustable U.S. Government Fund 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 "Pricing
Shares" later in this 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 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 "Buying
and Selling Shares."
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible 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 trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
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Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Edward B. Jamieson (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
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 or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission Systems,
Inc. (wireless communications); director or trustee, as the case may be, of 27
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems) and
General Partner, Peregrine Associates, which was the General Partner of
Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities Dealers,
Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 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 Adjustable Rate Securities Portfolios, except as follows: Edward B.
Jamieson, President and Trustee of the Trust, is not an officer or trustee of
the Adjustable Rate Securities Portfolios. Charles E. Johnson, Vice President of
the Trust, is President and Trustee of the Adjustable Rate Securities
Portfolios. The following trustee of the Adjustable Rate Securities Portfolios
is not an officer or trustee of the Trust.
POSITIONS
AND OFFICES
WITH THE ADJUSTABLE PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS RATE SECURITIES PORTFOLIOS DURING THE PAST FIVE YEARS
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William J. Lippman (74)
One Parker Plaza
Fort Lee, NJ 07024
Trustee
Senior Vice President, Franklin Resources, Inc. and Franklin Management, Inc.;
President and Director, Franklin Advisory Services, Inc.; and officer and/or
director or trustee, as the case may be, of six of the investment companies in
the Franklin Templeton Group of Funds.
Mr. Lippman is considered an "interested person" of the Portfolios under the
1940 Act.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TRUST1 TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FUNDS2 SERVES3
- --------------------------------------------------------------------------------
Frank Abbott, III $17,410 27
Harris Ashton $17,264 49
S. Joseph Fortunato $16,946 51
Edith E. Holiday $12,925 25
Frank W.T. LaHaye $18,010 27
Gordon Macklin $17,264 49
1. For the fiscal year ended October 31, 1998.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with approximately 168 U.S. based
funds or series.
Noninterested board members 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 or trustee. 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 Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The Portfolio's and the Bond Fund's manager is
Franklin Advisers, Inc. The manager is wholly owned by Franklin Resources,
Inc. (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.
The manager provides investment research and portfolio management services, and
selects the securities for the Portfolio and the Bond Fund to buy, hold or sell.
The manager also selects the brokers who execute the Portfolio's and the Bond
Fund's portfolio transactions. The manager provides periodic reports to the
board and to the board of trustees of the Adjustable Rate Securities Portfolios,
which reviews and supervises the manager's investment activities. To protect the
Portfolio and the Bond Fund, the manager and its officers, directors and
employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the Portfolio and the Bond Fund. Similarly,
with respect to the Portfolio and the Bond Fund, the manager is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that the manager and access persons, as defined by applicable federal
securities laws, may buy or sell for its or their own account or for the
accounts of any other fund. The manager is not obligated to refrain from
investing in securities held by the Portfolio and the Bond Fund or other funds
it manages. Of course, any transactions for the accounts of the manager and
other access persons will be made in compliance with the Portfolio's and the
Bond Fund's code of ethics.
Under the Portfolio's and the Bond Fund's code of ethics, employees of the
Franklin Templeton Group who are access persons may 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 by the close of the business day following the day
clearance is granted; (ii) copies of all brokerage confirmations and statements
must be sent to a compliance officer; (iii) all brokerage accounts must be
disclosed on an annual basis; and (iv) access persons involved in preparing and
making investment decisions must, in addition to (i), (ii) and (iii) 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.
The Bond Fund's sub-advisor is Templeton Investment Counsel, Inc. The
sub-advisor has an agreement with the manager and provides the manager with
investment management advice and assistance. The sub-advisor's activities are
subject to the board's review and control, as well as the manager's instruction
and supervision.
MANAGEMENT FEES Under its management agreement, the Portfolio pays Advisers a
management fee equal to an annual rate of:
o 0.400% of the value of net assets up to and including $5 billion; and
o 0.350% of the value of net assets over $5 billion and not over $10
billion; and
o 0.330% of the value of net assets over $10 billion and not over $15
billion; and
o 0.300% of the value of net assets in excess of $15 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement.
For the last three fiscal years ended October 31, the Portfolio and the Bond
Fund paid the following management fees, before any advance waiver:
Management Fees Paid ($)
- ------------------------------------------------------------------------------
1998 1997 1996
Mortgage Portfolio1 795,797 830,598 1,090,876
Securities Portfolio2 51,389 51,453 41,378
Bond Fund3 0 - -
- ------------------------------------------------------------------------------
1. For the fiscal years ended 1998, 1997, and 1996, management fees, before any
advance waiver, totaled $1,272,933, $1,487,256, and $1,891,159,
respectively.
2. For the fiscal years ended 1998, 1997, and 1996, management fees, before any
advance waiver, totaled $96,734, $96,727, and $89,969, respectively.
3. For the period from August 3, 1998 to October 31, 1998. Management fees,
before any advance waiver, totaled $24,877. Under an agreement by the
manager to waive its fees, the fund paid the management fees shown.
For the Bond Fund the manager pays the sub-advisor a fee equal to a monthly rate
of .20% paid to the manager. The manager pays this fee from the management fees
it receives from the fund. For the fiscal year ended October 31, the manager
paid the following sub-advisory fees:
Sub-Advisory Fees Paid ($)
- -------------------------------------------------
19981 11,707
1. For the period from August 3, 1998 to October 31, 1998.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the Bond Fund to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the Bond Fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
Franklin Advisers, Inc. has an agreement with the Adjustable U.S. Government
Fund and Adjustable Rate Securities Fund to provide certain administrative
services and facilities for the Portfolio.
ADMINISTRATION FEES The Bond Fund pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the fiscal year ended October 31, 1998 (For the period from August 3,
1998 to October 31, 1998) the Bond Fund did not pay FT Services any
administration fees.
Under its administration agreement, the Adjustable U.S. Government Fund and the
Adjustable Rate Securities Fund pay Advisers an administration fee equal to an
annual rate of:
o 0.10% of the fund's average daily net assets up to $5 billion;
o 0.09% of average daily net assets over $5 billion up to $2 billion;
o 0.08% of average daily net assets over $10 billion.
During the last three fiscal years ended October 31, the funds paid Advisers the
following administration fees:
Administrative Fees Paid ($)
- ------------------------------------------------------------------------------
1998 1997 1996
Adjustable U.S. 313,856 363,663 462,426
Government Fund
Adjustable Rate 23,128 19,960 15,384
Securities Fund
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The funds
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the Portfolio's and fund's securities and
other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the Bond 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, the manager 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 is negotiated between
the manager 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. The manager 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 the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager 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 the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Bond Fund.
They must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager 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, the manager 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, 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 Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the
manager, 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 may improve execution and reduce transaction costs to the
fund.
During the fiscal years ended 1998, 1997, and 1996, the Portfolio did not pay
any brokerage commissions.
During the last fiscal year ended October 31, the Bond Fund paid the following
brokerage commissions:
Brokerage Commissions ($)
------------------------------------------------
19981 $30,383
1. For the period from August 3, 1998 to October 31, 1998.
As of October 31, 1998, the Adjustable Rate Securities Fund owned securities
issued by Merrill Lynch Mortgage Investors Inc. valued at $780,000. The Bond
Fund owned securities issued by First Chicago NBD Corp., Bear, Stearns & Co.
Inc., Deutsche Bank Capital Corp., Morgan Stanley & Co. Inc., Merrill Lynch
Mortgage Investors Inc. and Salomon Inc. valued in the aggregate at $315,000,
$776,000, $151,000, $148,000, $508,000 and $303,000, respectively. Except as
noted, the fund did not own any securities issued by its regular
broker-dealers as of the end of the fiscal year." As of October 31, 1998,
neither the funds nor the Portfolio owned securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
DISTRIBUTIONS OF NET INVESTMENT INCOME The Adjustable U.S. Government Fund and
the Adjustable Rate Securities Fund earn income and gains on their investment in
the Portfolio. The Portfolio receives income generally in the form of interest
and other income on their investments. This income, less expenses incurred in
the operation of the Portfolio, is paid to the Adjustable U.S. Government Fund
and the Adjustable Rate Securities Fund as ordinary dividend income. The
ordinary dividend income received from the Portfolio, less expenses incurred in
the operation of the Adjustable U.S. Government Fund and the Adjustable Rate
Securities Fund, constitutes a fund's net investment income from which dividends
may be paid to you. Any distributions by the Adjustable U.S. Government Fund and
the Adjustable Rate Securities Fund from such income will be taxable to you as
ordinary income, whether you take them in cash or in additional shares. The Bond
Fund receives income generally in the form of interest on its investments. This
income, less expenses incurred in the operation of the Bond Fund, constitutes
the fund's net investment income from which dividends may be paid to you. Any
distributions by the Bond Fund from such income will be taxable to you as
ordinary income, whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The Portfolio may realize capital gains from
sales or dispositions of its securities. These capital gains are distributed to
the Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund as
capital gain distributions. The Adjustable U.S. Government Fund and the
Adjustable Rate Securities Fund may also derive capital gains and losses in
connection with sales or other dispositions of Portfolio shares. The Bond Fund
may derive capital gains in connection with sales or other dispositions of its
securities. Distributions from net short-term capital gains will be taxable to
you as ordinary income. Distributions from net long-term capital gains,
including capital gain distributions received from the Portfolio, will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in a fund. Any net capital gains realized by a fund generally will
be distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on a fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS The Bond Fund is authorized to
invest in foreign securities. Most foreign exchange gains realized on the sale
of debt securities are treated as ordinary income by the fund. Similarly,
foreign exchange losses realized by the fund on the sale of debt securities are
generally treated as ordinary losses by the fund. These gains when distributed
will be taxable to you as ordinary dividends, and any losses will reduce the
fund's ordinary income otherwise available for distribution to you. This
treatment could increase or reduce the fund's ordinary income distributions to
you, and may cause some or all of the fund's previously distributed income to be
classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares. All or a portion
of any loss that you realize upon the redemption of your fund shares will be
disallowed to the extent that you buy other shares in such fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to your
tax basis in the new shares you purchase.
DEFERRAL OF BASIS. If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
a fund. In so doing, all or a portion of the sales charge that you paid for your
original shares in a fund will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government subject
in some states to minimum investment requirements that must be met by a fund.
Investments in Government National Mortgage Association or Federal National
Mortgage Association securities, bankers' acceptances, commercial paper and
repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations. It is anticipated, however, that no portion of
the Adjustable U.S. Government Fund's or the Adjustable Rate Securities Fund's
distributions to you will qualify for exemption from state and local personal
income tax as dividends paid from interest earned on direct obligations of the
U.S. government. Even if the Portfolio invests in direct obligations of the U.S.
government, the Adjustable U.S. Government Fund and the Adjustable Rate
Securities Fund do so only indirectly by investing in the Portfolio's shares.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because each fund's income is
directly or indirectly attributable primarily to interest, no portion of their
distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the funds for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The Bond Fund and the Portfolio may invest in
complex securities. These investments may be subject to numerous special and
complex tax rules. These rules could affect whether gains and losses are treated
as ordinary income or capital gain, accelerate the recognition of income to
and/or defer the Bond Fund's or the Portfolio's ability to recognize losses,
and, in limited cases, subject the Bond Fund to U.S. federal income tax on
income from certain of its foreign securities. In turn, these rules may affect
the amount, timing or character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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Each fund is a diversified series of Franklin Investor Securities Trust, an
open-end management investment company, commonly called a mutual fund. The trust
was organized as a Massachusetts business trust on December 22, 1986, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
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 that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The funds currently offer one class of shares, except the Bond Fund which offers
two classes of shares, Class A and Advisor Class. Before January 1, 1999, Class
A shares were designated Class I. The funds may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Adjustable U.S. Government Securities Fund
o Franklin Adjustable Rate Securities Fund
o Franklin Bond Fund - Class A
o Franklin Bond Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting may also be called by the board in its discretion.
As of December 9, 1998, the principal shareholders of the fund, beneficial or of
record, were:
Name and Address Share Class Percentage (%)
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ADJUSTABLE RATE SECURITIES FUND
First Union Brokerage Services Class A 5.25
Theofilos A Vatis
A/C 8569-4401
4551 Gulf Shore Blvd North
Penthouse 4
Naples FL 34103-4404
BOND FUND
Franklin Resources, Inc.1 Class A 56.63
Corporate Accounting
555 Airport Blvd 4th Floor
Burlingame, CA 94010
Franklin Templeton Fund Advisor 18.30
Allocator Class
Conservative Target Fund
c/o Fund Accounting Dept.
1810 Gateway 3RD Floor
San Mateo, CA 94404-2470
Franklin Templeton Fund Advisor 34.81
Allocator Class
Moderate Target Fund
c/o Fund Accounting Dept.
1810 Gateway 3RD Floor
San Mateo, CA 94404-2470
Franklin Templeton Fund Advisor 39.17
Allocator Class
Growth Target Fund
c/o Fund Accounting Dept.
1810 Gateway 3RD Floor
San Mateo, CA 94404-2470
Franklin Resources, Inc. Advisor 7.35
Corporate Accounting Class
555 Airport Blvd 4TH Floor
Burlingame, CA 94010
1. Franklin Resources, Inc. is a Delaware Corporation.
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 of December 9, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class. The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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.
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.
For the Adjustable U.S. Government Fund, if you buy shares through the
reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for the Bond
Fund - Class A and 2.25% for the Adjustable U.S. Government Fund and the
Adjustable Rate Securities Fund.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or 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 (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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 application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI may also qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions, although any such plan that purchased the fund's Class A
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in the fund's Class A
shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Valuemark Funds or the Templeton Variable Products Series Fund. You
should contact your tax advisor for information on any tax consequences that
may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid and
the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
sales charge. We may enter into a special arrangement with a securities dealer,
based on criteria established by the fund, to add together certain small
qualified retirement plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
SALES IN TAIWAN. 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.
The Bond Fund's Class A shares and the Adjustable U.S. Government and Adjustable
Rate Securities funds 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 A shares may be
offered with the following schedule of sales charges:
Size of Purchase - U.S. Dollars Sales Charge (%)
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Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the fund's
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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 A shares by certain retirement plans without an initial sales
charge: 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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge may also be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
CDSC WAIVERS. The CDSC for any share class will generally be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the securities dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, or (iv) the securities dealer of record has entered into a
supplemental agreement with Distributors
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 (excluding the Bond Fund)
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
(excluding the Bond Fund)
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
EXCHANGE PRIVILEGE For the Adjustable U.S. Government Securities Fund, if you
request the exchange of the total value of your account, declared but unpaid
income dividends and capital gain distributions will be reinvested in the fund
and exchanged into the new fund at net asset value when paid. For the Adjustable
Rate Securities Fund and the Bond Fund, 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the Portfolio or 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
goals exist immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. 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. 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 CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
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 U.S. Securities and Exchange
Commission (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.
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 and to send the certificate and assignment form in separate
envelopes.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
the prospectus.
Franklin Templeton Investor Services, Inc. (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.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the Portfolio
and fund value them according to the broadest and most representative market as
determined by the manager.
The Bond Fund values portfolio securities underlying actively traded call
options at their market price as determined above. The current market value of
any option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last sale
price is outside the bid and ask prices, the fund values options within the
range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The Bond Fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 foreign security is valued within the range
of the most recent quoted bid and ask prices. 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 NAV. 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 close of the NYSE. The value of these securities used in computing the NAV
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 close of the NYSE that will not be reflected in the computation of the NAV.
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 use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended October 31, 1998:
Amount Received in
Connection with
Total Commissions Amount Retained by Redemptions and
Received ($) Distributors ($) Repurchases ($)
- --------------------------------------------------------------------------------
1998
Adjustable U.S. 188,713 26,700 0
Government Fund
Adjustable Rate 82,360 9,988 4,402
Securities Fund
Bond Fund 30,383 1,924 0
1997
Adjustable U.S. 160,892 22,069 0
Government Fund
Adjustable Rate 95,835 14,072 0
Securities Fund
Bond Fund - - -
1996
Adjustable U.S. 151,651 19,401 35
Government Fund
Adjustable Rate 24,584 3,268 0
Securities Fund
Bond Fund - - -
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are 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; a
prorated portion of Distributors' overhead expenses; and the expenses of
printing prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.25% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have incurred
them.
The Class A plan for the Adjustable U.S. Government Securities and the
Adjustable Rate Securities Fund does not permit unreimbursed expenses incurred
in a particular year to be carried over to or reimbursed in later years.
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, the manager or
Distributors or other parties on behalf of the fund, the manager or Distributors
make payments that are deemed to be for the financing of any activity primarily
intended to result in the sale of fund shares within the context of Rule 12b-1
under the Investment Company Act of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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 noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 the manager 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 noninterested board
members, 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, 1998, Distributors eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the plans
were:
Distributors' Eligible Amount Paid
Expenses ($) by the Fund ($)
- -------------------------------------------------------------------------
Adjustable U.S. 1,053,596 784,007
Government Fund
Adjustable Rate 77,108 53,103
Securities Fund
Bond Fund 20,514 2,087
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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial 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 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 initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial 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 returns for the indicated periods ended October 31, 1998, were:
Since Inception(12/26/91)
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Adjustable U.S. 1.90% 4.04% 5.56%
Government Fund
Since Inception
(12/26/91)
Adjustable Rate 3.09% 4.90% N/A 5.08%
Securities Fund
- -------------------------------------------------------------------------------
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 each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial 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, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated periods
ended October 31, 1998, were:
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Adjustable U.S. 1.90% 21.90% 71.74%
Government Fund
Adjustable Rate 3.09% 27.02% Since
Securities Fund Inception(12/26/91)
40.41%
Bond Fund - Class Since Inception
A (8/3/98)
-0.34%
- -------------------------------------------------------------------------------
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 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 yields for the 30-day period ended October 31, 1998, were:
- ----------------------------------------------
Adjustable U.S. Government 4.81%
Fund
Adjustable Rate Securities 4.65%
Fund
Bond Fund - Class A 4.40%
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. 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 for the Bond Fund and
short-term capital gains, and is calculated over a different period of time. The
current distribution rates for the 30-day period ended October 31, 1998 were:
- ----------------------------------------------
Adjustable U.S. Government 4.51%
Fund
Adjustable Rates Securities 4.80%
Fund
Bond Fund 4.99%
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 cumulative
total return, average annual total return and other measures of performance 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
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 goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 goal, 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:
Adjustable U.S. Government Fund and Adjustable Rate Securities Fund:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
o 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.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines provide
performance statistics over specified time periods.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o 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.
Bond Fund:
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o 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 Historical data supplied by the research departments of CS First
Boston Corporation, the J. P. Morgan companies, Salomon Brothers,
Merrill Lynch, Lehman Brothers and Bloomberg L.P.
o 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.
o 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.
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 certificates of deposit (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 is one of the
oldest mutual fund organizations and now services more than 3 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, a pioneer in international investing. The Mutual Series team,
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 $216 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
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DESCRIPTION OF BOND RATINGS
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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 that 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. These
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. These 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 that are speculative to a high degree.
These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Municipal 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: Municipal bonds rated Aa are judged to be 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 that make the
long-term risks appear somewhat larger.
A: Municipal 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 that suggest a
susceptibility to impairment sometime in the future.
Baa: Municipal 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.
These bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.
Ba: Municipal 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 may be very moderate and, thereby,
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Municipal 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: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Municipal bonds rated Ca represent obligations that are speculative to a
high degree. These issues are often in default or have other marked
shortcomings.
C: Municipal bonds rated C are the lowest-rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Con.(-): Municipal bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon the
completion of construction or the elimination of the basis of the condition.
STANDARD & POOR'S CORPORATION (S&P)
AAA: Municipal bonds rated AAA are the highest-grade obligations. They possess
the ultimate degree of protection as to principal and interest. In the market,
they move with interest rates and, hence, provide the maximum safety on all
counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in the
majority of instances differ from AAA issues only in a small degree. Here, too,
prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe. They predominantly reflect money rates in their market behavior but
also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate 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: Municipal 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 these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C: This 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH INVESTORS SERVICE, INC. (FITCH)
AAA: Municipal bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal that is unlikely to be affected by reasonably
foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong although not quite as strong as bonds rated AAA and not
significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's ability
to pay interest and repay principal may be affected over time by adverse
economic changes. Business and financial alternatives can be identified,
however, that could assist the obligor in satisfying its debt service
requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics which,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
CC: Municipal bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C: Municipal bonds rated C are in imminent default in the payment of interest
or principal.
DDD, DD and D: Municipal bonds rated DDD, DD and D are in default on interest
and/or principal payments. Such bonds are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest potential for recovery
while D represents the lowest potential for recovery.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA, DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing; factors of the first importance in long-term borrowing
risk are of lesser importance in the short run. Symbols used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from established
cash flows of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although not
so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted for,
but lacking the undeniable strength of the preceding grades. Market access for
refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds. After
June 29, 1984, for new municipal note issues due in three years or less, the
ratings below will usually be assigned. Notes maturing beyond three years will
most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN BOND FUND
FRANKLIN INVESTORS SECURITIES TRUST
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated March 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in the
fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
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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.
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GOAL AND STRATEGIES
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The fund's principal investment goal is to provide a high level of current
income consistent with the preservation of capital. Its secondary goal is
capital appreciation over the long term. These goals are fundamental, which
means they may not be changed without shareholder approval.
The fund tries to achieve its investment goal by investing at least 65% of
its total assets in investment grade fixed-income securities, including debt
securities and mortgage-backed and asset-backed securities. Up to 35% of the
fund's total assets may be invested in non-investment grade fixed-income
securities.
Below is a description of various types of securities that the fund may buy.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; commercial paper; time deposits;
bankers' acceptances. A debt security typically has a fixed payment schedule
which obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
MORTGAGE-BACKED SECURITIES represent an ownership interest in mortgage loans
made by banks and other financial institutions to finance purchases of homes,
commercial buildings or other real estate. These mortgage loans may have
either fixed or adjustable interest rates. The individual mortgage loans are
packaged or "pooled" together for sale to investors. As the underlying
mortgage loans are paid off, investors receive principal and interest
payments.
The fund may invest in mortgage-backed securities issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), as well as mortgage-backed securities issued or guaranteed by
foreign governments or governmental agencies or by private institutions.
A mortgage-backed security is an interest in a pool of mortgage loans. The
primary issuers or guarantors of these securities are GNMA, FNMA and FHLMC.
GNMA creates mortgage-backed 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 backed
by the full faith and credit of the U.S. government. Mortgage securities from
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 would 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, these securities are generally
considered to be high quality investments having minimal credit risks.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly 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. The fund invests in both
"modified" and "straight" pass-through securities. For "modified
pass-through" type mortgage securities, principal and interest are
guaranteed, whereas such guarantee is not available for "straight
pass-through" securities.
Guarantees as to the timely payment of principal and interest do not extend
to the value or yield of mortgage-backed securities nor do they extend to the
value of the fund's shares. In general, the value of fixed-income securities
varies with changes in market interest rates. Fixed-rate mortgage securities
generally decline in value during periods of rising interest rates, whereas
coupon rates of adjustable rate mortgage securities move with market interest
rates, and thus their value tends to fluctuate to a lesser degree. In view of
these factors, the ability of the fund to obtain a high level of total return
may be limited under varying market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS") AND MULTI-CLASS PASS-THROUGHS. The fund may invest in
certain debt obligations that are collateralized by mortgage loans or
mortgage pass-through securities. These obligations may be issued or
guaranteed by U.S. government agencies or issued by certain financial
institutions and other mortgage lenders. CMOs and REMICs are debt instruments
issued by special purpose entities and are secured by pools of mortgages
backed by residential and various types of commercial properties. 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 debt service on the
CMO or REMIC or make scheduled distributions on the multi-class pass-through
securities.
CMOs are collateralized by pools of mortgage loans created by commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other issuers in the U.S. Timely payment of interest and
principal (but not the market value and yield) of some of these pools is
supported by various forms of insurance or guarantees issued by private
issuers, those who pool the mortgage assets and, in some cases, by U.S.
government agencies. Prepayments of the mortgages underlying a CMO, which
usually increase when interest rates decrease, will generally reduce the life
of the mortgage pool, thus impacting the CMO's yield. Under these
circumstances, the reinvestment of prepayments will generally be at a rate
lower than the rate applicable to the original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, 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 a CMO,
however, may cause it to be retired substantially earlier than the stated
maturities or final distribution dates. Interest is paid or accrues on all
classes of a CMO on a monthly, quarterly or semiannual basis. The principal
and interest on the underlying mortgages may be allocated among several
classes of a series in many ways. In a common structure, payments of
principal, including any principal prepayments, on the underlying mortgages
are applied to the classes of a series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment
of principal will be made on any class of a CMO until all other classes
having an earlier stated maturity or final distribution date have been paid
in full. Some of the CMOs in which the fund may invest may be less liquid
than other types of mortgage securities. A lack of liquidity in the market
for CMOs could result in the fund's inability to dispose of such securities
at an advantageous price under certain circumstances.
To the extent any privately issued CMOs in which the fund invests are
considered by the SEC to be an investment company, the fund will limit its
investments in such securities in a manner consistent with the provisions of
the 1940 Act.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured
by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. As with CMOs, the mortgages that
collateralize the REMICs in which the fund may invest include mortgages
backed by GNMAs or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities or issued by private
entities, which are not guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields
on CMOs issued or guaranteed by U.S. government agencies. However, the risk
of loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government.
STRIPPED MORTGAGE-BACKED SECURITIES. The fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available
from fixed-rate mortgage securities. The stripped mortgage-backed securities
in which the fund may invest will not be limited to those issued or
guaranteed by agencies or instrumentalities of the U.S. government, although
such securities are more liquid than privately issued stripped
mortgage-backed securities. Stripped mortgage-backed securities are usually
structured with two classes, each receiving different proportions of the
interest and principal distributions on a pool of mortgage assets. Typically,
one class will receive some of the interest and most of the principal from
the mortgage assets, while the other class will receive most of the interest
and the remainder of the principal.
In the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity of an IO
and PO class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests and are purchased and
sold by institutional investors, such as the fund, through several investment
banking firms acting as brokers or dealers. 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 of trustees. The board of trustees may, in the future,
adopt procedures that would permit the fund to acquire, hold, and treat as
liquid government-issued IO and PO securities. At the present time, however,
all such securities will be treated as illiquid and will, together with any
other illiquid investments, not exceed 15% of the fund's net assets. This
position may be changed in the future, without notice to shareholders, in
response to the staff's continued reassessment of this matter, as well as to
changing market conditions.
As new types of mortgage-backed securities are developed and offered to
investors, the fund may invest in them if they are consistent with the fund's
objectives, policies and quality standards.
OTHER STRUCTURED INVESTMENTS. In addition to CMOs and stripped
mortgage-backed securities, the fund may invest in other structured
investments such as collateralized loan obligations and collateralized bond
obligations. These securities typically are issued in one or more classes
that are backed by or represent an interest in certain underlying instruments
with the cash flows on the underlying instruments apportioned among the
classes to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions. The
fund may invest in structured investments that are either subordinated or
unsubordinated to the right of payment of another class. Subordinated
structured investments typically have higher yields and present greater risks
than unsubordinated structured investments. Although the fund's purchase of
subordinated structured investments would have a similar economic effect to
that of borrowing against the underlying securities, the purchase will not be
deemed to be leverage for purposes of the limitations placed on the extent of
the fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the fund's investment in
these structured investments may be limited by the restrictions contained in
the 1940 Act. Structured investments are often sold in private placement
transactions. To the extent such investments are illiquid, they will be
subject to the fund's restrictions on investments in illiquid securities.
ADJUSTABLE RATE MORTGAGE SECURITIES. The fund may invest in adjustable rate
mortgage securities ("ARMs"). ARMs, like traditional mortgage-backed
securities, are an interest in a pool of mortgage loans and are issued or
guaranteed by a federal agency or by private issuers. Unlike fixed-rate
mortgages, which generally decline in value during periods of rising interest
rates, the interest rates on the mortgages underlying ARMs are reset
periodically and thus allow the fund to participate in increases in interest
rates, resulting in both higher current yields and lower price fluctuations.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower current yields. Because of this
feature, the value of an ARM is unlikely to rise during periods of declining
interest rates to the same extent as a fixed-rate instrument. The rate of
amortization of principal, as well as interest payments, for certain types of
ARMs change in accordance with movements in a pre-specified, published
interest rate index. There are several categories of indices, including those
based on U.S. Treasury securities, those derived from a calculated measure,
such as a cost of funds index, or a moving average of mortgage rates and
actual market rates. The amount of interest due to an ARM security 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. The
interest rates paid on the ARMs in which the fund may invest are generally
readjusted at intervals of one year or less, although instruments with longer
resets such as three, five, seven and ten years are also permissible
investments.
The underlying mortgages that collateralize the ARMs in which the fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes
in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization, which can extend the average life of the securities. Since most
ARMs in the fund's portfolio will generally have annual reset limits or caps
of 100 to 200 basis points, fluctuations in interest rates above these levels
could cause the mortgage securities to "cap out" and to behave more like
long-term, fixed-rate debt securities.
ASSET-BACKED SECURITIES The fund may invest in asset-backed securities. The
assets underlying these securities may include, but are not limited to,
receivables on home equity and credit card loans, and automobile, mobile home
and recreational vehicle loans and leases. There may be other types of
asset-backed securities that are developed in the future in which the fund
may invest. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans. The rate of
principal payment on asset-backed securities generally depends on the rate of
principal payments received on the underlying assets. The payment rate may be
affected by various economic and 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 underlying assets, how well the issuers of the
securities are insulated from the credit risk of the originator or affiliated
entities, and the amount of credit support provided to the securities.
Asset-backed securities entail certain risks not presented by 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 the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables,
there is a risk that the holders may not have either a proper or first
security interest in all of the obligations backing such receivables due to
the large number of vehicles involved in a typical issuance and 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.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of
failures by obligors on the underlying assets to make payments, asset-backed
securities may contain elements of credit support. Credit support falls into
two categories: (i) liquidity protection and (ii) protection against losses
from the default by an obligor on the underlying assets. Liquidity protection
refers to advances, generally provided 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 from the default by an obligor 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 fund 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 that are subordinate to the other classes with respect 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 "over-collateralization" (where the scheduled
payments on, or the principal amount of, the underlying assets exceeds that
required to make payments on the securities and pay any servicing or other
fees). The degree of credit support provided 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 securities.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS The fund may buy U.S.
government obligations on a "when issued" or "delayed delivery" basis. These
transactions are arrangements under which the fund buys securities that have
been authorized but not yet issued with payment for and delivery of the
security scheduled for a future time, generally in 30 to 60 days. Purchases
of U.S. government securities on a when issued or delayed delivery basis are
subject to 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 U.S. government 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 fund is the buyer in this type of 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 the fund's
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 its investment
objectives and policies, and not for the purpose of investment leverage. In
when issued and delayed delivery transactions, the fund relies on the seller
to complete the transaction. The seller's failure to do so may cause the fund
to miss a price or yield considered advantageous to the fund. Securities
purchased on a when issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. Entering into a when issued or
delayed delivery transaction is a form of leverage that may affect changes in
net asset value to a greater extent.
MORTGAGE DOLLAR ROLLS The fund may enter into mortgage dollar rolls in which
the fund 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 period
between the sale and repurchase, the fund forgoes principal and interest paid
on the mortgage-backed securities. The fund is compensated by the difference
between the current sale price and the lower 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
mortgage dollar roll for which there is an offsetting cash position or a cash
equivalent security position. The fund could suffer a loss if the contracting
party fails to perform the future transaction in that the fund may not be
able to buy back the mortgage-backed securities it initially sold. The fund
intends to enter into mortgage dollar rolls only with government securities
dealers recognized by the Federal Reserve Board or with member banks of the
Federal Reserve System.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills, notes and
bonds, which are direct obligations of the U.S. government, backed by the
full faith and credit of the U.S. Treasury, and in securities issued or
guaranteed by federal agencies. The fund may also invest in securities issued
or guaranteed by foreign governments and their agencies.
DERIVATIVE SECURITIES Futures contracts, option transactions and foreign
currency exchange transactions are generally considered "derivative
securities."
FUTURES CONTRACTS. The fund may enter into contracts for the purchase or sale
for future delivery of financial futures and foreign currency futures and
options on these contracts. Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of
a specified quantity of a financial instrument, such as a security, or the
cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities 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 obligation to acquire the securities
called for by the contract at a specified price on a specified date. Futures
contracts have been designed by exchanges that have been designated
"contracts 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.
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 different interest rates 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, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The termination of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical 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 securities. 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 buys 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 the market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund will be required to pay 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.
Generally, the purpose of the acquisition or sale of a futures contract is to
attempt to protect the fund from fluctuations in the price of portfolio
securities without actually buying or selling the underlying security,
although the fund may engage in futures and related options to earn
additional income. 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 expects that interest rates may decline, the fund may
purchase futures contracts 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 and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market 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 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 distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
OPTIONS ON FUTURES CONTRACTS. The fund may buy and sell (write) options on
futures contracts. 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.
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. The fund may lose
the entire amount of the premium (plus related transaction costs) paid for
options it has purchased if the option expires worthless. 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 reductions 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 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.
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. 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 same currency.
For example, an Italian lira-denominated position could be constructed by
buying a German mark-denominated debt security and simultaneously entering
into a Forward Contract to exchange an equal amount of marks for lira at a
future date and at a specified exchange rate. With such a transaction, the
fund may be able to receive a return that is substantially similar from a
yield and currency perspective to a direct investment in lira debt securities
while achieving other benefits from holding the underlying security. The fund
may experience slightly different results from its use of such combined
investment positions as compared to its purchase of a debt security
denominated in the particular currency subject to the Forward Contract. This
difference may be enhanced or offset by premiums that may be available in
connection with the Forward Contract.
The fund may also enter into a Forward Contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of that
security. Additionally, for example, when the fund believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may
enter into a Forward Contract to sell an amount of that foreign currency
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency; or when the fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may
enter into a Forward Contract to buy that foreign currency for a fixed dollar
amount.
The fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable debt
securities equal to the amount of the purchase will be held in segregated
accounts with the fund's custodian bank to be used to pay for the commitment,
or the fund will cover any commitments under these contracts to sell currency
by owning the underlying currency (or an absolute right to acquire such
currency). The segregated account will be marked-to-market daily.
SHORT SELLING In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. To complete
the transaction, the fund must borrow the security to make delivery to the
buyer. The fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. Until the
security is replaced, the fund must pay the lender any dividends or interest
that accrues during the period of the loan. To borrow the security, the fund
may also be required to pay a premium, which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the broker,
to the extent necessary to meet margin requirements, until the short position
is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the fund replaces the borrowed security, and the fund will realize a gain if
the security declines in price between those same dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of any premium, dividends or interest the fund is required to pay in
connection with the short sale.
The fund will place in a segregated account with its custodian bank an amount
equal to the difference between (a) the market value of the securities sold
short at the time they were sold short and (b) any cash or securities
required to be deposited as collateral with the broker in connection with the
short sale (not including the proceeds from the short sale). The segregated
account will be marked-to-market daily and at no time will the amount
deposited in the segregated account and with the broker as collateral be less
than the market value of the securities at the time they sold short. Under
amendments made by the Revenue act of 1997, entering into a short sale could
cause immediate recognition of gain (but not loss) on the date the
constructive sale of an appreciated financial position is entered.
ILLIQUID AND RESTRICTED SECURITIES The fund may invest up to 15% of its net
assets in illiquid securities. Illiquid securities are 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
include, among other things, repurchase agreements of more than seven days
duration and other securities which are not readily marketable. Investments
in savings deposits are generally considered illiquid and will, together with
other illiquid investments, not exceed 15% of the fund's total net assets.
Notwithstanding this limitation, 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, as amended (the "1933 Act") ("restricted
securities"), where such investment is consistent with the fund's investment
objective and the 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 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 of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the board of trustees
will take into account the following factors: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the fund invests in restricted securities that
are deemed liquid, the general level of illiquidity in the fund may be
increased if qualified institutional buyers become uninterested in purchasing
these securities or the market for these securities contracts.
SECURITIES LENDING The fund may lend to broker-dealers portfolio securities
with an aggregate market value up to 33 1/3% of its total assets. Such loans
must be secured by collateral (consisting of any combination of cash, U.S.
government securities or irrevocable letters of credit) in an amount at least
equal (on a daily marked-to-market basis) to the current market value of the
securities loaned. The fund may terminate the loans at any time and obtain
the return of the securities. The fund will continue to receive any interest
or dividends paid on the loaned securities and will continue to have voting
rights with respect to the securities.
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian, securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to dispose of the underlying securities.
The fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the fund's board of trustees, i.e.,
banks or broker-dealers which have been determined by the manager to present
no serious risk of becoming involved in bankruptcy proceedings within the
time frame contemplated by the repurchase transaction.
BORROWING The fund does not borrow money, except that the fund may borrow for
temporary or emergency purposes in an amount not to exceed 30% of its total
assets (including the amount borrowed).
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Borrow money, except that the fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not
exceeding 30% of the value of the fund's total assets (including the amount
borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment objectives and policies, and (c) to the extent the entry into
a repurchase agreement is deemed to be a loan.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies,
and other indices or any other financial instruments, and may purchase and
sell options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest. 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.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities).
7. Purchase the securities of any one issuer (other than the U.S. government
or any of its agencies or instrumentalities), if immediately after such
investment (a) more than 5% of the value of the fund's total assets would be
invested in such issuer or (b) more than 10% of the outstanding voting
securities of such issuer would be owned by the fund, except that up to 25%
of the value of such fund's total assets may be invested without regard to
such 5% and 10% limitations.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
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.
Risks
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There is no assurance that the fund will meet its investment goal.
Investments in securities that have potential to increase in value may be
subject to a greater degree of risk and may be more volatile than other types
of investments.
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 market as a whole.
INTEREST RATE RISK Because the fund invests primarily 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, consequently, its share price.
Rising interest rates, which often occur during times of inflation or a
growing economy, are likely to cause the face value of a debt security to
decrease, having a negative effect on the value of the fund's shares. Of
course, interest rates have increased and decreased, sometimes very
dramatically, in the past. These changes are likely to occur again in the
future at unpredictable times.
MORTGAGE-BACKED SECURITIES The fund's investment in mortgage-backed
securities differs from conventional debt securities because principal is
paid back over the life of the security rather than at maturity. The fund may
receive unscheduled prepayments of principal due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage loans. During periods
of declining interest rates, the volume of principal prepayments generally
increases as borrowers refinance their mortgages at lower rates. The fund may
be forced to reinvest returned principal at lower interest rates, reducing
the fund's income. For this reason, mortgage-backed securities may be less
effective than other types of securities as a means of "locking in" long-term
interest rates and may have less potential for capital appreciation during
periods of falling interest rates than other investments with similar
maturities. A reduction in the anticipated rate of principal prepayments,
especially during periods of rising interest rates, may increase the
effective maturity of mortgage-backed securities, making them more
susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase the volatility of the fund's returns
and share price.
To the extent mortgage securities are purchased at a premium, unscheduled
principal prepayments, including prepay-ments resulting from mortgage
foreclosures, 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 you,
will be taxable as ordinary income.
FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. A fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value. Foreign markets
have substantially less volume than the New York Stock Exchange ("NYSE"),
and securities of some foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Commission rates in foreign
countries, which are generally fixed rather than subject to negotiation as in
the U.S., are likely to be higher. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY RISK The fund's management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread on
currency exchange (to cover service charges) may be incurred, particularly
when the fund changes investments from one country to another or when
proceeds of the sale of shares in U.S. dollars are used for the purchase of
securities in foreign countries. Also, some countries may adopt policies that
would prevent the fund from transferring cash out of the country or withhold
portions of interest and dividends at the source. There is the possibility of
cessation of trading on national exchanges, expropriation, nationalization,
or confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board of trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The board of
trustees also considers the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories.
However, in the absence of willful misfeasance, bad faith, or gross
negligence on the part of the manager, any losses resulting from the holding
of the fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the shareholders. No
assurance can be given that the board of trustees' appraisal of the risks
will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy or, the issuers of the securities.
In addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may
diminish a fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain low rated or unrated debt securities may also make it
more difficult for a fund to obtain accurate market quotations for the
purposes of valuing the fund's portfolio. Market quotations are generally
available on many low rated or unrated securities only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated dent
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities. The ability of a fund to achieve
its investment goal may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would
be the case if the fund were invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, a fund
may incur additional expenses to seek recovery.
The risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional
risk, however, because unlike securities that pay interest throughout the
time until maturity, the fund will not receive any cash until the cash
payment date. If the issuer defaults, the fund may not obtain any return on
its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Current federal income tax law requires a holder of a zero-coupon security to
report as income each year the portion of original issue discount on the
security that accrues that year, even though the holder receives no cash
payments of interest during the year. Pay-in-kind securities pay interest by
issuing more bonds. The fund is deemed to receive interest over the life of
these bonds and is treated as if the interest were paid on a current basis
for federal income tax purposes, although the fund does not receive any cash
interest payments until maturity or the cash payment date. Accordingly,
during times when the fund does not receive any cash interest payments on its
zero-coupon, deferred interest or pay-in-kind securities, it may have to sell
portfolio securities to meet distribution requirements and these sales may be
subject to the risk factors discussed above. The fund is not limited in the
amount of its assets that may be invested in these types of securities.
DERIVATIVE SECURITIES RISK
FUTURES CONTRACTS. Futures contracts entail risks. Although the fund believes
that use of such contracts will benefit the fund, if the manager's investment
judgment about pertinent market movements is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if the fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions.
Similarly, if the fund sells a foreign currency futures contract and the U.S.
dollar value of the currency unexpectedly increases, the fund will lose the
beneficial effect of 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 securities from its portfolio to meet daily
variation margin requirements. These sales may be, but will not necessarily
be, 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.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in financial futures and related options also depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as these securities will not duplicate the
components of any index or underlying securities, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both the securities and
the hedging instrument.
Positions in financial futures and related options may be closed out only on
an exchange that provides a secondary market. There can be no assurance that
a liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close a
futures or option position. The inability to close futures or options
positions could have an adverse impact on the fund's ability to effectively
hedge its securities. The fund will enter into a futures or option position
only if there appears to be a liquid secondary market for such futures or
option.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
that any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The fund does not believe that these trading and
positions limits will have an adverse impact on the fund's futures strategies.
OPTIONS ON FUTURES. 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.
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 fund may enter into forward currency exchange contracts in order to limit
the risk from adverse changes in the relationship between currencies.
However, these 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.
The purchase and sale of exchange-traded foreign currency options are 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.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
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 board also monitors the fund to ensure no material conflicts exist among
share classes. While none is expected, the board will act appropriately to
resolve any material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
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Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (packaged foods and allied products) (1994-present);
director or trustee, as the case may be, of 25 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), National Child Research Center, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and
Public Liaison-United States Treasury Department (1988-1989).
*Edward B. Jamieson (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 50 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; 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 or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Director, Quarterdeck Corporation
(software firm) and Digital Transmission Systems, Inc. (wireless
communications); director or trustee, as the case may be, of 27 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Director, Fischer Imaging Corporation (medical imaging systems) and General
Partner, Peregrine Associates, which was the General Partner of Peregrine
Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI WorldCom, MedImmune,
Inc. (biotechnology), Spacehab, Inc. (aerospace services) and Real 3D
(software); director or trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman,
White River Corporation (financial services) and Hambrecht and Quist Group
(investment banking), and President, National Association of Securities
Dealers, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 34 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members may
also serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the fund and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
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Frank H. Abbott $17,410 27
Harris J. Ashton 17,264 49
S. Joseph Fortunato 16,946 51
Edith E. Holiday 12,925 25
Frank W.T. LaHaye 18,010 27
Gordon S. Macklin 17,264 49
1. For the fiscal year ended October 31, 1998. During the period from
November 1, 1997, through May 31, 1998, fees at the rate of $925 per month
plus $925 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 168 U.S. based funds or series.
Noninterested board members 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 or
trustee. 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
The manager is wholly owned by Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
The fund's sub-advisor is Templeton Investment Counsel, Inc. The sub-advisor
has an agreement with the manager and provides the manager with investment
management advice and assistance. The sub-advisor's activities are subject to
the board's review and control, as well as the manager's instruction and
supervision.
MANAGEMENT FEES The fee is computed according to the terms of the management
agreement. Each class of the fund's shares pays its proportionate share of
the fee.
For the fiscal year ended October 31, the fund paid the following management
fees:
Management Fees Paid ($)
- -------------------------------------------------
19981 0
1. For the period from August 3, 1998 through October 31, 1998. Management
fees, before any advance waiver, totaled $24,877. Under an agreement by the
manager to waive its fees, the fund paid the management fees shown.
The manager pays the sub-advisor a fee equal to a monthly rate of 25% of the
management fee paid to the manager. The manager pays this fee from the
management fees it receives from the fund. For the fiscal year ended October
31, the manager paid the following sub-advisory fees:
Sub-Advisory Fees Paid ($)
- -------------------------------------------------
19981 0
1. For the period from August 3, 1998 through October 31, 1998.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the fund to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an
annual rate of 0.20% of the average daily net assets of the fund.
For the fiscal year ended October 31, the fund paid FT Services the following
administration fees:
Administration Fees Paid ($)
------------------------------------------------
19981 0
1. For the period from August 3, 1998 through October 31, 1998.
Administration fees, before any advance waiver, totaled $11,707. Under an
agreement by FT Services to waive its fees, the fund paid the administration
fees shown.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The
fund may also reimburse Investor Services for certain out-of-pocket expenses,
which may include payments by Investor Services to entities, including
affiliated entities, that provide sub-shareholder services, recordkeeping
and/or transfer agency services to beneficial owners of the fund. The amount
of reimbursements for these services per benefit plan participant fund
account per year may not exceed the per account fee payable by the fund to
Investor Services in connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager 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, 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 Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the manager, 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 may improve execution and
reduce transaction costs to the fund.
For the period from August 3, 1998 through October 31, 1998, the fund did not
pay any brokerage commissions..
As of October 31, 1998, the fund owned securities issued by First Chicago NBD
Corp., Bear, Stearns & Co. Inc., Deutsche Bank Capital Corp., Morgan Stanley
& Co. Inc., Merrill Lynch Mortgage Investors Inc. and Salomon Inc. valued in
the aggregate at $315,000, $776,000, $151,000, $148,000, $508,000 and
$303,000, respectively. Except as noted, the fund did not own any securities
issued by its regular broker-dealers as of the end of the fiscal year.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in any distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of interest on its investments. This income, less expenses incurred
in the operation of the fund, constitutes the fund's net investment income
from which dividends may be paid to you. Any distributions by the fund from
such income will be taxable to you as ordinary income, whether you take them
in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, the fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. If you hold your shares as a capital asset,
the gain or loss that you realize will be capital gain or loss and will be
long-term or short-term, generally depending on how long you hold your
shares. Any loss incurred on the redemption or exchange of shares held for
six months or less will be treated as a long-term capital loss to the extent
of any long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In so doing, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis
in the shares sold will be added to the tax basis of the shares you acquire
from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income
consists of interest rather than dividends, no portion of its distributions
will generally be eligible for the intercorporate dividends-received
deduction. None of the dividends paid by the fund for the most recent
calendar year qualified for such deduction, and it is anticipated that none
of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses, and,
in limited cases, subject the fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
The fund is a diversified series of Franklin Investors Securities Trust, an
open-end management investment company, commonly called a mutual fund. The
trust was organized as a Massachusetts business trust on December 22, 1986,
and is registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The 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 that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet
its obligations.
The fund currently offers two classes of shares, Class A and Advisor Class.
Before January 1, 1999, Class A shares were designated Class. The fund may
offer additional classes of shares in the future. The full title of each
class is:
o Franklin Bond Fund - Class A
o Franklin Bond Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, 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. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a board member. A special meeting may also be called by the board in its
discretion.
As of December 7, 1998, the principal shareholders of the fund, beneficial or
of record, were:
Name and Address Share Class Percentage (%)
- ---------------------------------------------------------------
Franklin Resources, Inc. Class I 56.63
Corporate Accounting
Attn. Michael Corcoran
555 Airport Blvd. 4th Floor
Burlingame, CA 94010
Franklin Templeton Fund Advisor 18.30
Allocator Class
Conservative Target Fund
C/O Fund Accounting Dept.
Kimberly Monasterio
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470
Franklin Templeton Fund Advisor 34.81
Allocator Class
Moderate Target Fund
C/O Fund Accounting Dept.
Kimberly Monasterio
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470
Franklin Templeton Fund Advisor 7.35
Allocator Class
Growth Target Fund
C/O Fund Accounting Dept.
Kimberly Monasterio
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470
Franklin Resources, Inc. Advisor 7.35
Corporate Accounting Class
555 Airport Blvd. 4th Floor
Burlingame, CA 94010
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 of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION 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 rules of the
National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
EXCHANGE PRIVILEGE 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. 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. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. 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.
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 U.S. Securities
and Exchange Commission (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.
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 and to send the certificate and assignment form in separate
envelopes.
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.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by
law. Neither the fund nor its agents shall be liable to you or any other
person if, for any reason, a redemption request by wire is not processed as
described in the prospectus.
Franklin Templeton Investor Services, Inc. (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.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 foreign security is
valued within the range of the most recent quoted bid and ask prices.
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 NAV. 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 close of the NYSE. The value of these securities used in computing
the NAV 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 close of the NYSE that will not be reflected in the
computation of the NAV. 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 use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
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.
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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
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 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 initial sales charge currently in effect.
These figures 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 each period at the end of each period
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, is based on the actual
return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated
period ended October 31, 1998, were:
Since Inception
(8/3/98)
- ---------------------------------------
Advisor Class 4.17%
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 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 the 30-day period ended October 31, 1998, was:
Yield
- -------------------------------------
Advisor Class 4.84%
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. 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 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 the 30-day period ended October 31,
1998, was:
Distribution Rate
- --------------------------------------------
Advisor Class 5.45%
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 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 goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 goal, 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:
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and
mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices -
measures yield, price and total return for Treasury, agency,
corporate, mortgage and Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices -
measures yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of
40 bonds. The index attempts to track the new-issue market as closely
as possible, so it changes bonds twice a month, adding all new bonds
that meet certain requirements and deleting an equivalent number
according to their secondary market trading activity. As a result, the
average par call date, average maturity date, and average coupon rate
can and have changed over time. The average maturity generally has
been about 29-30 years.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
o 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 Historical data supplied by the research departments of CS First
Boston Corporation, the J. P. Morgan companies, Salomon Brothers,
Merrill Lynch, Lehman Brothers and Bloomberg L.P.
o 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.
o 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.
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 certificates of deposit (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 is one of
the oldest mutual fund organizations and now services more than 3 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, a pioneer in international investing. The Mutual
Series team, 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 $216 billion in assets under management for
more than 6 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 117 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF BOND RATINGS
- ------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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
that 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. These 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. These 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 that are speculative to a high
degree. These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN INVESTORS SECURITIES TRUST
FILE NOS. 33-11444 &
811-4986
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(A) ARTICLES OF INCORPORATION
(i) Agreement and Declaration of Trust dated December 16, 1986
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iii) Certificate of Amendment of Agreement and Declaration of
Trust dated March 13, 1990
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iv) Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1989
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 26, 1998
(B) BY-LAWS
(i) By-Laws
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Amendment to By-Laws dated January 18, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated April 15, 1987
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Administration Agreement between Registrant, on behalf of
Franklin Adjustable U.S. Government Securities Fund, and
Franklin Advisers, Inc. dated June 3, 1991
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iii) Administration Agreement between Registrant, on behalf of
Franklin Adjustable Rate Securities Fund, and Franklin
Advisers, Inc. dated December 26, 1991
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iv) Subadvisory Agreement between Franklin Advisers, Inc., on
behalf of Franklin Investors Securities Trust (on behalf
of its series: Franklin Global Government Income Fund),
and Templeton Investment Counsel, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(v) Amendment dated August 1, 1995 to the Administration
Agreement between Registrant, on behalf of Franklin
Adjustable Rate Securities Fund, and Franklin Advisers,
Inc. dated December 26, 1991
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(vi) Amendment dated August 1, 1995 to the Administration
Agreement between Registrant, on behalf of Franklin
Adjustable U.S. Government Securities Fund, and Franklin
Advisers, Inc. dated June 3, 1991
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(vii) Investment Advisory Agreement between Registrant, on
behalf of Franklin Bond Fund, and Franklin Advisers, Inc.
dated July 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(viii) Subadvisory Agreement between Franklin Advisers, Inc., on
behalf of Franklin Investors Securities Trust (on behalf
of its series: Franklin Bond Fund), and Templeton
Investment Counsel, Inc. dated July 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(E) UNDERWRITING CONTRACTS
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
(G) CUSTODIAN AGREEMENTS
(i) Global Custody Agreement between The Chase Manhattan
Bank, N.A. and Franklin Investors Securities Trust, on
behalf of Franklin Global Government Income Fund, dated
July 28, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(ii) Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996
(iii) Terminal Link Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996
(iv) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February
16, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 26, 1998
(v) Amendment dated February 27, 1998 to Exhibit A of the
Master Custody Agreement between the Registrant and Bank
of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(vi) Foreign Custody Manager Agreement between the Registrant
and Bank of New York made as of July 30, 1998, effective
as of February 27, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(H) OTHER MATERIAL CONTRACTS
(i) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated April 30, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services,
Inc.
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(ii) Fund Administration Agreement between Registrant, on behalf
of Franklin Bond Fund, and Franklin Templeton Services,
Inc. dated July 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel dated December 14, 1998
(J) OTHER OPINIONS
(i) Consent of Independent Auditors
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
(i) Letter of Understanding relating to Franklin Global
Government Income Fund - Class II and Franklin Equity
Income Fund - Class II dated April 12, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Letter of Understanding relating to Franklin Adjustable
Rate Securities Fund
Filing: Post-Effective Amendment No. 10 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: June 1, 1992
(iii) Letter of Understanding relating to Franklin Bond Fund
dated July 24, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(M) RULE 12B-1 PLAN
(i) Distribution Plan between Registrant, on behalf of
Franklin Global Government Income Fund, and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Distribution Plan between Registrant, on behalf of
Franklin Short-Intermediate U.S. Government Securities
Fund, and Franklin/Templeton Distributors, Inc. dated May
1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iii) Distribution Plan between Registrant, on behalf of
Franklin Convertible Securities Fund, and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iv) Amended and Restated Distribution Plan between
Registrant, on behalf of Franklin Adjustable U.S.
Government Securities Fund, and Franklin/Templeton
Distributors, Inc. dated July 1, 1993
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(v) Distribution Plan between Registrant, on behalf of
Franklin Equity Income Fund, and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(vi) Amended and Restated Distribution Plan between
Registrant, on behalf of Franklin Adjustable Rate
Securities Fund, and Franklin/Templeton Distributors,
Inc. dated July 1, 1993
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(vii) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Global Government
Income Fund, and Franklin/Templeton Distributors, Inc.
dated March 30, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(viii) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Convertible Securities
Fund, and Franklin/Templeton Distributors, Inc. dated
September 29, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(ix) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Equity Income Fund, and
Franklin/Templeton Distributors, Inc. dated March 30, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(x) Form of Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Equity Income Fund -
Class B, and Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(xi) Form of Distribution Plan between Registrant, on behalf
of Franklin Bond Fund, and Franklin/Templeton
Distributors, Inc.
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(O) RULE 18F-3 PLAN
(i) Multiple Class Plan for Franklin Global Government Income
Fund dated June 18, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 31, 1996
(ii) Multiple Class Plan for Franklin Short-Intermediate U.S.
Government Securities Fund dated June 18, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 31, 1996
(iii) Multiple Class Plan for Franklin Convertible Securities
Fund dated August 15, 1995
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 28, 1997
(iv) Form of Multiple Class Plan for Franklin Equity Income
Fund dated March 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(v) Multiple Class Plan for Franklin Bond Fund dated July 16,
1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(P) POWER OF ATTORNEY
(i) Power of Attorney for Franklin Investors Securities Trust
dated April 16, 1998
Filing: Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A
File No. 33-11444
File Date: May 20, 1998
(ii) Certificate of Secretary for Franklin Investors
Securities Trust dated April 16, 1998
Filing: Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A
File No. 33-11444
File Date: May 20, 1998
(iii) Power of Attorney for Adjustable Rate Securities
Portfolios dated February 16, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(iv) Certificate of Secretary for Adjustable Rate Securities
Portfolios dated February 16, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(27) Financial Data Schedule
(i) Financial Data Schedule for Franklin Global Government
Income Fund - Class I
(ii) Financial Data Schedule for Franklin Global Government
Income Fund - Class II
(iii) Financial Data Schedule for Franklin Global Government
Income Fund - Advisor Class
(iv) Financial Data Schedule for Franklin Short-Intermediate
U.S. Government Securities Fund - Class I
(v) Financial Data Schedule for Franklin Short-Intermediate
U.S. Government Securities Fund - Advisor Class
(vi) Financial Data Schedule for Franklin Convertible Securities
Fund - Class I
(vii) Financial Data Schedule for Franklin Convertible Securities
Fund - Class II
(viii) Financial Data Schedule for Franklin Adjustable U.S.
Government Securities Fund - Class I
(ix) Financial Data Schedule for Franklin Equity Income Fund -
Class I
(x) Financial Data Schedule for Franklin Equity Income Fund -
Class II
(xi) Financial Data Schedule for Franklin Adjustable Rate
Securities Fund - Class I
(xii) Financial Data Schedule for Franklin Bond Fund - Class I
(xiii) Financial Data Schedule for Franklin Bond Fund - Advisor
Class
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
THE FUND
None
ITEM 25 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) The officers and directors of the Registrant's manager, Administrator,
and the Master Fund's investment adviser, Franklin Advisers, Inc.
("Advisers") also serve as officers and/or directors for (1) Advisers'
corporate parent, Franklin Resources, Inc., and/or (2) other investment
companies in the Franklin Templeton Group of Funds. In addition, Mr. Charles
B. Johnson was formerly a director of General Host Corporation. For
additional information please see Part B and Schedules A and D of Form ADV of
Advisers (SEC File 801-26292), incorporated herein by reference, which sets
forth the officers and directors of Advisers and information as to any
business, profession, vocation or employment of a substantial nature engaged
in by those officers and directors during the past two years.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc., an indirect, wholly owned subsidiary of
Franklin Resources, Inc., serves as the Franklin Global Government Income
Fund's Sub-adviser, furnishing to Franklin Advisers, Inc. in that capacity,
portfolio management services and investment research. For additional
information please see part B and Schedules A and D of Form ADV of the
Franklin Global Government Income Fund's Sub-adviser (SEC File 801-15125),
incorporated herein by reference, which sets forth the officers and directors
of the Sub-adviser and information as to any business, profession, vocation
or employment of a substantial nature engages in by those officers and
directors during the past two years.
ITEM 27 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of this
N-1A and Schedule A of Form BD filed by Distributors with the Securities and
Exchange Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889).
c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin Templeton Investor Services, Inc., both
of whose address is 777 Mariners Island Blvd., San Mateo, CA. 94404.
ITEM 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30 UNDERTAKINGS
a) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A including the required information in
the Registrant's annual report and to furnish each person to whom a
prospectus is delivered a copy of the annual report upon request and without
charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 29th
day of December, 1998.
FRANKLIN INVESTORS SECURITIES TRUST
(Registrant)
By: EDWARD B. JAMIESON*
Edward B. Jamieson,
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
EDWARD B. JAMIESON* Trustee and Principal
Edward B. Jamieson Executive Officer
Dated: December 29, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: December 29, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: December 29, 1998
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: December 29, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: December 29, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: December 29, 1998
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: December 29, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: December 29, 1998
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: December 29, 1998
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: December 29, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: December 29, 1998
*By /s/ Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the undersigned has duly consented to the
filing of this Registration Statement of Franklin Investors Securities Trust
and has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of San Mateo and the State
of California, on the 29th day of December, 1998.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
(Registrant)
By: CHARLES E. JOHNSON*
Charles E. Johnson,
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following Trustees and Officers of
Adjustable Rate Securities Portolios in the capacities and on the dates
indicated:
CHARLES E. JOHNSON* Trustee and Principal
Charles E. Johnson Executive Officer
Dated: December 29, 1998
MARTIN L. FLANAGAN Principal Financial Officer
Martin L. Flanagan Dated: December 29, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: December 29, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: December 29, 1998
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: December 29, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: December 29, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: December 29, 1998
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: December 29, 1998
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: December 29, 1998
WILLIAM J. LIPPMAN* Trustee
William J. Lippman Dated: December 29, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: December 29, 1998
*By /s/ Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN INVESTORS SECURITIES TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust dated *
December 16, 1986
EX-99.(a)(ii) Certificate of Amendment of Agreement and *
Declaration of Trust dated March 21, 1995
EX-99.(a)(iii) Certificate of Amendment of Agreement and *
Declaration of Trust dated March 13, 1990
EX-99.(a)(iv) Certificate of Amendment of Agreement and *
Declaration of Trust dated March 21, 1989
EX-99.(b)(i) By-Laws *
EX-99.(b)(ii) Amendment to By-Laws dated January 18, 1994 *
EX-99.(d)(i) Management Agreement between Registrant and *
Franklin Advisers, Inc. dated April 15, 1987
EX-99.(d)(ii) Administration Agreement between Registrant, on *
behalf of Franklin Adjustable U.S. Government
Securities Fund, and Franklin Advisers, Inc.
dated June 3, 1991
EX-99.(d)(iii) Administration Agreement between Registrant, on *
behalf of Franklin Adjustable Rate Securities
Fund, and Franklin Advisers, Inc. dated
December 26, 1991
EX-99.(d)(iv) Subadvisory Agreement between Franklin *
Advisers, Inc., on behalf of Franklin Investors
Securities Trust (on behalf of its series:
Franklin Global Government Income Fund), and
Templeton Investment Counsel, Inc. dated May 1,
1994
EX-99.(d)(v) Amendment dated August 1, 1995 to the *
Administration Agreement between Registrant, on
behalf of Franklin Adjustable Rate Securities
Fund, and Franklin Advisers, Inc. dated
December 26, 1991
EX-99.(d)(vi) Amendment dated August 1, 1995 to the *
Administration Agreement between Registrant, on
behalf of Franklin Adjustable U.S. Government
Securities Fund, and Franklin Advisers, Inc.
dated June 3, 1991
EX-99.(d)(vii) Investment Advisory Agreement between *
Registrant, on behalf of Franklin Bond Fund,
and Franklin Advisers, Inc. dated July 16, 1998
EX-99.(d)(viii) Subadvisory Agreement between Franklin *
Advisers, Inc., on behalf of Franklin Investors
Securities Trust (on behalf of its series:
Franklin Bond Fund), and Templeton Investment
Counsel, Inc. dated July 16, 1998
EX-99.(e)(i) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc. dated March 29, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc. and
Securities Dealers
EX-99.(g)(i) Global Custody Agreement between The Chase *
Manhattan Bank, N.A. and Franklin Investors
Securities Trust, on behalf of Franklin Global
Government Income Fund, dated July 28, 1995
EX-99.(g)(ii) Master Custody Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.(g)(iii) Terminal Link Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.(g)(iv) Amendment dated May 7, 1997 to Master Custody *
Agreement between Registrant and Bank of New
York dated February 16, 1996
EX-99.(g)(v) Amendment dated February 27, 1998 to Exhibit A *
of the Master Custody Agreement between
Registrant and Bank of New York dated February
16, 1996
EX-99.(g)(vi) Foreign Custody Manager Agreement between *
Registrant and Bank of New York made as of July
30, 1998, effective as of February 27, 1998
EX-99.(h)(i) Subcontract for Fund Administrative Services *
dated October 1, 1996 and Amendment thereto
dated April 30, 1998 between Franklin Advisers,
Inc. and Franklin Templeton Services, Inc.
EX-99.(h)(ii) Fund Administration Agreement between *
Registrant, on behalf of Franklin Bond Fund,
and Franklin Templeton Services, Inc. dated
July 16, 1998
EX-99.(i)(i) Opinion and Consent of Counsel dated December Attached
14, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(l)(i) Letter of Understanding relating to Franklin *
Global Government Income Fund - Class II and
Franklin Equity Income Fund - Class II dated
April 12, 1995
EX-99.(l)(ii) Letter of Understanding relating to Franklin *
Adjustable Rate Securities Fund
EX-99.(l)(iii) Letter of Understanding relating to Franklin *
Bond Fund dated July 24, 1998
EX-99.(m)(i) Distribution Plan between Registrant, on behalf *
of Franklin Global Government Income Fund, and
Franklin/Templeton Distributors, Inc. dated May
1, 1994
EX-99.(m)(ii) Distribution Plan between Registrant, on behalf *
of Franklin Short-Intermediate U.S. Government
Securities Fund, and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
EX-99.(m)(iii) Distribution Plan between Registrant, on behalf *
of Franklin Convertible Securities Fund, and
Franklin/Templeton Distributors, Inc. dated May
1, 1994
EX-99.(m)(iv) Amended and Restated Distribution Plan between *
Registrant, on behalf of Franklin Adjustable
U.S. Government Securities Fund, and
Franklin/Templeton Distributors, Inc. dated July
1, 1993
EX-99.(m)(v) Distribution Plan between Registrant, on behalf *
of Franklin Equity Income Fund, and
Franklin/Templeton Distributors, Inc. dated May
1, 1994
EX-99.(m)(vi) Amended and Restated Distribution Plan between *
Registrant, on behalf of Franklin Adjustable
Rate Securities Fund, and Franklin/Templeton
Distributors, Inc. dated
July 1, 1993
EX-99.(m)(vii) Class II Distribution Plan pursuant to Rule *
12b-1 between Registrant, on behalf of Franklin
Global Government Income Fund, and
Franklin/Templeton Distributors, Inc. dated
March 30, 1995
EX-99.(m)(viii) Class II Distribution Plan pursuant to Rule *
12b-1 between Registrant, on behalf of Franklin
Convertible Securities Fund, and
Franklin/Templeton Distributors, Inc. dated
September 29, 1995
EX-99.(m)(ix) Class II Distribution Plan pursuant to Rule *
12b-1 between Registrant, on behalf of Franklin
Equity Income Fund, and Franklin/Templeton
Distributors, Inc. dated March 30, 1995
EX-99.B15(x) Form of Distribution Plan pursuant to Rule *
12b-1 between Registrant, on behalf of Franklin
Equity Income Fund - Class B, and
Franklin/Templeton Distributors, Inc.
EX-99.(m)(xi) Form of Distribution Plan between Registrant, *
on behalf of Franklin Bond Fund, and
Franklin/Templeton Distributors, Inc.
EX-99.(o)(i) Multiple Class Plan for Franklin Global *
Government Income Fund dated June 18, 1996
EX-99.(o)(ii) Multiple Class Plan for Franklin *
Short-Intermediate U.S. Government Securities
Fund dated June 18, 1996
EX-99.(o)(iii) Multiple Class Plan for Franklin Convertible *
Securities Fund dated August 15, 1995
EX-99.(o)(iv) Form of Multiple Class Plan for Franklin Equity *
Income Fund
EX-99.(o)(v) Multiple Class Plan for Franklin Bond Fund *
dated July 16, 1998
EX-99.(p)(i) Power of Attorney for Franklin Investors *
Securities Trust dated April 16, 1998
EX-99.(p)(ii) Certificate of Secretary for Franklin Investors *
Securities Trust dated April 16, 1998
EX-99.(p)(iii) Power of Attorney for Adjustable Rate *
Securities Portfolios dated February 16, 1995
EX-99.(p)(iv) Certificate of Secretary for Adjustable Rate *
Securities Portfolios dated February 16, 1995
EX-27.B(i) Financial Data Schedule for Franklin Global Attached
Government Income Fund - Class I
EX-27.B(ii) Financial Data Schedule for Franklin Global Attached
Government Income Fund - Class II
EX-27.B(iii) Financial Data Schedule for Franklin Global Attached
Government Income Fund - Advisor Class
EX-27.B(iv) Financial Data Schedule for Franklin Attached
Short-Intermediate U.S. Government Securities
Fund - Class I
EX-27.B(v) Financial Data Schedule for Franklin Attached
Short-Intermediate U.S. Government Securities
Fund - Advisor Class
EX-27.B(vi) Financial Data Schedule for Franklin Attached
Convertible Securities Fund - Class I
EX-27.B(vii) Financial Data Schedule for Franklin Attached
Convertible Securities Fund - Class II
EX-27.B(viii) Financial Data Schedule for Franklin Adjustable Attached
U.S. Government Securities Fund - Class I
EX-27.B(ix) Financial Data Schedule for Franklin Equity Attached
Income Fund - Class I
EX-27.B(x) Financial Data Schedule for Franklin Equity Attached
Income Fund - Class II
EX-27.B(xi) Financial Data Schedule for Franklin Adjustable Attached
Rate Securities Fund - Class I
EX-27.B(xii) Financial Data Schedule for Franklin Bond Fund Attached
- Class I
EX-27.B(xiii) Financial Data Schedule for Franklin Bond Fund Attached
- Advisor Class
*Incorporated by Reference
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
26 to the Registration Statement of Franklin Investors Securities Trust on
Form N-1A (File No. 33-11444) of our reports dated December 9, 1998, on our
audits of the financial statements and financial highlights of Franklin
Investors Securities Trust, and Adjustable Rate Securities Portfolios for the
year ended October 31, 1998.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
December 23, 1998
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
December 14, 1998
Franklin Investors Securities Trust
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust, as
amended, (the "Declaration of Trust") of the Franklin Investors Securities
Trust (the "Trust"), a business trust organized under the laws of the
Commonwealth of Massachusetts on December 22, 1986, the By-Laws of the Trust,
and the resolutions adopted by the Trust's Board of Trustees organizing the
business of the Trust, all as amended to date, and the various pertinent
proceedings we deem material. We have also examined the Notification of
Registration and the Registration Statements filed under the Investment
Company Act of 1940 (the "Investment Company Act") and the Securities Act of
1933 (the "Securities Act"), all as amended to date, as well as other items
we deem material to this opinion.
The Trust is authorized by its Declaration of Trust to issue an
unlimited number of shares of beneficial interest with a par value $0.01 per
share. The Trust issues shares of series designated the Franklin Global
Government Income Fund, Franklin Short-Intermediate U.S. Government
Securities Fund, Franklin Convertible Securities Fund, Franklin Adjustable
U.S. Government Securities Fund, Franklin Equity Income Fund and Franklin
Adjustable Rate Securities Fund. The Declaration of Trust designates, or
authorizes the Trustees to designate, one or more series or classes of shares
of the Trust, and allocates, or authorizes the Trustees to allocate, shares
of beneficial interest to each such series or class. The Declaration of
Trust also empowers the Trustees to designate any additional series or
classes and allocate shares to such series or classes.
The Trust has filed with the U.S. Securities and Exchange
Commission (the "Commission"), a Registration Statement under the Securities
Act, which Registration Statement is deemed to register an indefinite number
of shares of the Trust pursuant to the provisions of Rule 24f-2 under the
Investment Company Act. You have further advised us that the Trust has
filed, and each year hereafter will timely file, a Notice pursuant to Rule
24f-2 perfecting the registration of the shares sold by the Trust during each
fiscal year during which such registration of an indefinite number of shares
remains in effect.
You have also informed us that the shares of the Trust have been,
and will continue to be, sold in accordance with the Trust's usual method of
distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in
accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as
the Trust remains a valid and subsisting trust under the laws of the
Commonwealth of Massachusetts, and the registration of an indefinite number
of shares of the Trust remains effective, the authorized shares of the Trust
when issued for the consideration set by the Board of Trustees pursuant to
the Declaration of Trust, and subject to compliance with Rule 24f-2, will be
legally outstanding, fully-paid, and non-assessable shares, and the holders
of such shares will have all the rights provided for with respect to such
holding by the Declaration of Trust and the laws of the Commonwealth of
Massachusetts.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments
thereto, filed in accordance with the securities laws of the several states
in which shares of the Trust are offered, and we further consent to reference
in the registration statement of the Trust to the fact that this opinion
concerning the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /S/ BRUCE G. LETO
Bruce G. Leto
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Franklin Global Government Income Fund's October 31, 1998 annual report and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 113845936
<INVESTMENTS-AT-VALUE> 108514705
<RECEIVABLES> 9550108
<ASSETS-OTHER> 121661
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118186474
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 770782
<TOTAL-LIABILITIES> 770782
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 125474707
<SHARES-COMMON-STOCK> 13436494
<SHARES-COMMON-PRIOR> 14074297
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (792503)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1961405)
<ACCUM-APPREC-OR-DEPREC> (5305107)
<NET-ASSETS> 117415692
<DIVIDEND-INCOME> 2226
<INTEREST-INCOME> 10086769
<OTHER-INCOME> 0
<EXPENSES-NET> (1170539)
<NET-INVESTMENT-INCOME> 8918456
<REALIZED-GAINS-CURRENT> 225201
<APPREC-INCREASE-CURRENT> (2655059)
<NET-CHANGE-FROM-OPS> 6488598
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8320901)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2683291
<NUMBER-OF-SHARES-REDEEMED> (3877271)
<SHARES-REINVESTED> 556177
<NET-CHANGE-IN-ASSETS> (6147252)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (184646)
<OVERDIST-NET-GAINS-PRIOR> (2971285)
<GROSS-ADVISORY-FEES> (722502)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1170539)
<AVERAGE-NET-ASSETS> 113328743
<PER-SHARE-NAV-BEGIN> 8.41
<PER-SHARE-NII> .62
<PER-SHARE-GAIN-APPREC> (0.17)
<PER-SHARE-DIVIDEND> (0.61)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.25
<EXPENSE-RATIO> .96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Franklin Global Government Income Fund's October 31, 1998 annual report and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 113845936
<INVESTMENTS-AT-VALUE> 108514705
<RECEIVABLES> 9550108
<ASSETS-OTHER> 121661
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118186474
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 770782
<TOTAL-LIABILITIES> 770782
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 125474707
<SHARES-COMMON-STOCK> 691521
<SHARES-COMMON-PRIOR> 531824
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (792,503)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1961405)
<ACCUM-APPREC-OR-DEPREC> (5305107)
<NET-ASSETS> 117415692
<DIVIDEND-INCOME> 2226
<INTEREST-INCOME> 10086769
<OTHER-INCOME> 0
<EXPENSES-NET> (1170539)
<NET-INVESTMENT-INCOME> 8918456
<REALIZED-GAINS-CURRENT> 225201
<APPREC-INCREASE-CURRENT> (2655059)
<NET-CHANGE-FROM-OPS> 6488598
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (365285)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 405491
<NUMBER-OF-SHARES-REDEEMED> (273562)
<SHARES-REINVESTED> 27768
<NET-CHANGE-IN-ASSETS> (6147252)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (184646)
<OVERDIST-NET-GAINS-PRIOR> (2971285)
<GROSS-ADVISORY-FEES> (722502)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1170539)
<AVERAGE-NET-ASSETS> 5401688
<PER-SHARE-NAV-BEGIN> 8.41
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> (0.17)
<PER-SHARE-DIVIDEND> (0.56)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.26
<EXPENSE-RATIO> 1.49
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Franklin Global Government Income Fund's October 31, 1998 annual report and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN GLOBAL GOVERNMENT INCOME FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 113845936
<INVESTMENTS-AT-VALUE> 108514705
<RECEIVABLES> 9550108
<ASSETS-OTHER> 121661
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 118186474
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 770782
<TOTAL-LIABILITIES> 770782
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 125474707
<SHARES-COMMON-STOCK> 100477
<SHARES-COMMON-PRIOR> 88115
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (792503)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1961405)
<ACCUM-APPREC-OR-DEPREC> (5305107)
<NET-ASSETS> 117415692
<DIVIDEND-INCOME> 2226
<INTEREST-INCOME> 10086769
<OTHER-INCOME> 0
<EXPENSES-NET> (1170539)
<NET-INVESTMENT-INCOME> 8918456
<REALIZED-GAINS-CURRENT> 225201
<APPREC-INCREASE-CURRENT> (2655059)
<NET-CHANGE-FROM-OPS> 6488598
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (55448)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30190
<NUMBER-OF-SHARES-REDEEMED> (24127)
<SHARES-REINVESTED> 6299
<NET-CHANGE-IN-ASSETS> (6147252)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (184646)
<OVERDIST-NET-GAINS-PRIOR> (2971285)
<GROSS-ADVISORY-FEES> (722502)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1170539)
<AVERAGE-NET-ASSETS> 750205
<PER-SHARE-NAV-BEGIN> 8.41
<PER-SHARE-NII> .63
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> (0.62)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.26
<EXPENSE-RATIO> .85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN SHORT-INTER U.S. GOV. SECURITIES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 217,518,738
<INVESTMENTS-AT-VALUE> 223,435,442
<RECEIVABLES> 8,767,434
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 232,202,876
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,426,618
<TOTAL-LIABILITIES> 4,426,618
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 227,502,256
<SHARES-COMMON-STOCK> 21,430,138
<SHARES-COMMON-PRIOR> 18,665,327
<ACCUMULATED-NII-CURRENT> 11,371
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (5,654,073)
<ACCUM-APPREC-OR-DEPREC> 5,916,704
<NET-ASSETS> 227,776,258
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,919,283
<OTHER-INCOME> 0
<EXPENSES-NET> (1,537,238)
<NET-INVESTMENT-INCOME> 10,382,045
<REALIZED-GAINS-CURRENT> 546,710
<APPREC-INCREASE-CURRENT> 3,385,195
<NET-CHANGE-FROM-OPS> 14,313,950
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,749,725)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21,448,883
<NUMBER-OF-SHARES-REDEEMED> (19,311,848)
<SHARES-REINVESTED> 627,776
<NET-CHANGE-IN-ASSETS> 35,341,083
<ACCUMULATED-NII-PRIOR> 497,678
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (6,200,783)
<GROSS-ADVISORY-FEES> (1,118,373)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,537,238)
<AVERAGE-NET-ASSETS> 198,101,864
<PER-SHARE-NAV-BEGIN> 10.290
<PER-SHARE-NII> 0.540
<PER-SHARE-GAIN-APPREC> 0.190
<PER-SHARE-DIVIDEND> (0.560)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.460
<EXPENSE-RATIO> 0.780
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> FRANKLIN SHORT-INTER U.S. GOV. SECURITIES FUND-ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 217,518,738
<INVESTMENTS-AT-VALUE> 223,435,442
<RECEIVABLES> 8,767,434
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 232,202,876
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,426,618
<TOTAL-LIABILITIES> 4,426,618
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 227,502,256
<SHARES-COMMON-STOCK> 348,555
<SHARES-COMMON-PRIOR> 37,349
<ACCUMULATED-NII-CURRENT> 11,371
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (5,654,073)
<ACCUM-APPREC-OR-DEPREC> 5,916,704
<NET-ASSETS> 227,776,258
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,919,283
<OTHER-INCOME> 0
<EXPENSES-NET> (1,537,238)
<NET-INVESTMENT-INCOME> 10,382,045
<REALIZED-GAINS-CURRENT> 546,710
<APPREC-INCREASE-CURRENT> 3,385,195
<NET-CHANGE-FROM-OPS> 14,313,950
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (118,627)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 312,657
<NUMBER-OF-SHARES-REDEEMED> (11,650)
<SHARES-REINVESTED> 10,199
<NET-CHANGE-IN-ASSETS> 35,341,083
<ACCUMULATED-NII-PRIOR> 497,678
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (6,200,783)
<GROSS-ADVISORY-FEES> (1,118,373)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,537,238)
<AVERAGE-NET-ASSETS> 198,101,864
<PER-SHARE-NAV-BEGIN> 10.300
<PER-SHARE-NII> 0.570
<PER-SHARE-GAIN-APPREC> 0.160
<PER-SHARE-DIVIDEND> (0.580)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.450
<EXPENSE-RATIO> 0.690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 197,483,936
<INVESTMENTS-AT-VALUE> 182,079,542
<RECEIVABLES> 33,610,519
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 215,690,061
<PAYABLE-FOR-SECURITIES> 2,137,603
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,450,680
<TOTAL-LIABILITIES> 3,588,283
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 235,242,256
<SHARES-COMMON-STOCK> 14,519,796
<SHARES-COMMON-PRIOR> 14,427,760
<ACCUMULATED-NII-CURRENT> 916,488
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (8,652,572)
<ACCUM-APPREC-OR-DEPREC> (15,404,394)
<NET-ASSETS> 212,101,778
<DIVIDEND-INCOME> 5,318,127
<INTEREST-INCOME> 8,817,126
<OTHER-INCOME> 0
<EXPENSES-NET> (2,802,370)
<NET-INVESTMENT-INCOME> 11,332,883
<REALIZED-GAINS-CURRENT> (8,538,539)
<APPREC-INCREASE-CURRENT> (28,430,686)
<NET-CHANGE-FROM-OPS> (25,636,342)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,877,888)
<DISTRIBUTIONS-OF-GAINS> (15,493,732)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,772,514
<NUMBER-OF-SHARES-REDEEMED> (6,083,262)
<SHARES-REINVESTED> 1,402,784
<NET-CHANGE-IN-ASSETS> (35,811,718)
<ACCUMULATED-NII-PRIOR> 1,287,973
<ACCUMULATED-GAINS-PRIOR> 18,108,020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,377,487)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,802,370)
<AVERAGE-NET-ASSETS> 251,484,011
<PER-SHARE-NAV-BEGIN> 14.740
<PER-SHARE-NII> .620
<PER-SHARE-GAIN-APPREC> (1.920)
<PER-SHARE-DIVIDEND> (.650)
<PER-SHARE-DISTRIBUTIONS> (1.040)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.750
<EXPENSE-RATIO> .980
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 197,483,936
<INVESTMENTS-AT-VALUE> 182,079,542
<RECEIVABLES> 33,610,519
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 215,690,061
<PAYABLE-FOR-SECURITIES> 2,137,603
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,450,680
<TOTAL-LIABILITIES> 3,588,283
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 235,242,256
<SHARES-COMMON-STOCK> 3,549,740
<SHARES-COMMON-PRIOR> 2,402,672
<ACCUMULATED-NII-CURRENT> 916,488
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (8,652,572)
<ACCUM-APPREC-OR-DEPREC> (15,404,394)
<NET-ASSETS> 212,101,778
<DIVIDEND-INCOME> 5,318,127
<INTEREST-INCOME> 8,817,126
<OTHER-INCOME> 0
<EXPENSES-NET> (2,802,370)
<NET-INVESTMENT-INCOME> 11,332,883
<REALIZED-GAINS-CURRENT> (8,538,539)
<APPREC-INCREASE-CURRENT> (28,430,686)
<NET-CHANGE-FROM-OPS> (25,636,342)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,820,566)
<DISTRIBUTIONS-OF-GAINS> (2,734,235)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,925,827
<NUMBER-OF-SHARES-REDEEMED> (1,045,779)
<SHARES-REINVESTED> 267,020
<NET-CHANGE-IN-ASSETS> (35,811,718)
<ACCUMULATED-NII-PRIOR> 1,287,973
<ACCUMULATED-GAINS-PRIOR> 18,108,020
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (1,377,487)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (2,802,370)
<AVERAGE-NET-ASSETS> 251,484,011
<PER-SHARE-NAV-BEGIN> 14.680
<PER-SHARE-NII> .510
<PER-SHARE-GAIN-APPREC> (1.910)
<PER-SHARE-DIVIDEND> (.540)
<PER-SHARE-DISTRIBUTIONS> (1.040)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.700
<EXPENSE-RATIO> 1.730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 321,282,773
<INVESTMENTS-AT-VALUE> 299,455,245
<RECEIVABLES> 1,116,138
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 300,571,383
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,273,792
<TOTAL-LIABILITIES> 2,273,792
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 404,916,455
<SHARES-COMMON-STOCK> 31,854,776
<SHARES-COMMON-PRIOR> 35,328,183
<ACCUMULATED-NII-CURRENT> 687,275
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (85,478,611)
<ACCUM-APPREC-OR-DEPREC> (21,827,528)
<NET-ASSETS> 298,297,591
<DIVIDEND-INCOME> 18,453,876
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1,578,556)
<NET-INVESTMENT-INCOME> 16,875,320
<REALIZED-GAINS-CURRENT> (2,511,193)
<APPREC-INCREASE-CURRENT> (1,201,807)
<NET-CHANGE-FROM-OPS> 13,162,320
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,143,101)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,728,448
<NUMBER-OF-SHARES-REDEEMED> (22,292,627)
<SHARES-REINVESTED> 1,090,772
<NET-CHANGE-IN-ASSETS> (36,692,870)
<ACCUMULATED-NII-PRIOR> 955,056
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (82,967,418)
<GROSS-ADVISORY-FEES> (313,856)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,578,556)
<AVERAGE-NET-ASSETS> 313,597,557
<PER-SHARE-NAV-BEGIN> 9.480
<PER-SHARE-NII> .510
<PER-SHARE-GAIN-APPREC> (.120)
<PER-SHARE-DIVIDEND> (.510)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.360
<EXPENSE-RATIO> .760<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1> INCLUDES THE FUND'S SHARE OF THE PORTFOLIO'S ALLOCATED
EXPENSES. EXPENSE RATIO EXCLUDING WAIVER .93%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> FRANKLIN EQUITY INCOME FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 403,590,782
<INVESTMENTS-AT-VALUE> 471,060,295
<RECEIVABLES> 43,189,221
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 514,249,516
<PAYABLE-FOR-SECURITIES> 3,119,582
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,823,809
<TOTAL-LIABILITIES> 4,943,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 413,391,404
<SHARES-COMMON-STOCK> 21,485,042
<SHARES-COMMON-PRIOR> 18,260,314
<ACCUMULATED-NII-CURRENT> 581,251
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 27,863,957
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 67,469,513
<NET-ASSETS> 509,306,125
<DIVIDEND-INCOME> 18,152,795<F1>
<INTEREST-INCOME> 1,793,468
<OTHER-INCOME> 0
<EXPENSES-NET> (5,057,327)
<NET-INVESTMENT-INCOME> 14,888,936
<REALIZED-GAINS-CURRENT> 27,859,622
<APPREC-INCREASE-CURRENT> 1,596,184
<NET-CHANGE-FROM-OPS> 44,344,742
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13,224,776)
<DISTRIBUTIONS-OF-GAINS> (15,051,100)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,015,338
<NUMBER-OF-SHARES-REDEEMED> (7,026,650)
<SHARES-REINVESTED> 1,236,040
<NET-CHANGE-IN-ASSETS> 111,474,474
<ACCUMULATED-NII-PRIOR> 603,756
<ACCUMULATED-GAINS-PRIOR> 16,986,141
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (2,419,689)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (5,057,327)
<AVERAGE-NET-ASSETS> 480,692,821
<PER-SHARE-NAV-BEGIN> 19.310
<PER-SHARE-NII> 0.640
<PER-SHARE-GAIN-APPREC> 1.420
<PER-SHARE-DIVIDEND> (0.650)
<PER-SHARE-DISTRIBUTIONS> (0.790)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 19.930
<EXPENSE-RATIO> 0.940
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1> Net of foreign taxes of $149,292.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> FRANKLIN EQUITY INCOME FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 403,590,782
<INVESTMENTS-AT-VALUE> 471,060,295
<RECEIVABLES> 43,189,221
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 514,249,516
<PAYABLE-FOR-SECURITIES> 3,119,582
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,823,809
<TOTAL-LIABILITIES> 4,943,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 413,391,404
<SHARES-COMMON-STOCK> 4,078,328
<SHARES-COMMON-PRIOR> 2,350,676
<ACCUMULATED-NII-CURRENT> 581,251
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 27,863,957
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 67,469,513
<NET-ASSETS> 509,306,125
<DIVIDEND-INCOME> 18,152,795<F1>
<INTEREST-INCOME> 1,793,468
<OTHER-INCOME> 0
<EXPENSES-NET> (5,057,327)
<NET-INVESTMENT-INCOME> 14,888,936
<REALIZED-GAINS-CURRENT> 27,859,622
<APPREC-INCREASE-CURRENT> 1,596,184
<NET-CHANGE-FROM-OPS> 44,344,742
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,678,440)
<DISTRIBUTIONS-OF-GAINS> (1,938,931)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,664,562
<NUMBER-OF-SHARES-REDEEMED> (1,103,002)
<SHARES-REINVESTED> 166,092
<NET-CHANGE-IN-ASSETS> 111,474,474
<ACCUMULATED-NII-PRIOR> 603,756
<ACCUMULATED-GAINS-PRIOR> 16,986,141
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (2,419,689)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (5,057,327)
<AVERAGE-NET-ASSETS> 480,692,821
<PER-SHARE-NAV-BEGIN> 19.260
<PER-SHARE-NII> 0.500
<PER-SHARE-GAIN-APPREC> 1.410
<PER-SHARE-DIVIDEND> (0.500)
<PER-SHARE-DISTRIBUTIONS> (0.790)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 19.880
<EXPENSE-RATIO> 1.690
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1> Net of foreign taxes of $149,292.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 061
<NAME> FRANKLIN ADJUSTABLE RATE SECURITIES FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 28,862,032
<INVESTMENTS-AT-VALUE> 28,943,162
<RECEIVABLES> 58,601
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 29,001,763
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 109,383
<TOTAL-LIABILITIES> 109,383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29,744,670
<SHARES-COMMON-STOCK> 2,903,576
<SHARES-COMMON-PRIOR> 2,122,079
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (933,420)
<ACCUM-APPREC-OR-DEPREC> 81,130
<NET-ASSETS> 28,892,380
<DIVIDEND-INCOME> 1,373,011
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (135,094)
<NET-INVESTMENT-INCOME> 1,237,917
<REALIZED-GAINS-CURRENT> (2,319)
<APPREC-INCREASE-CURRENT> (45,501)
<NET-CHANGE-FROM-OPS> 1,190,097
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,237,917)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,428,247
<NUMBER-OF-SHARES-REDEEMED> (1,741,821)
<SHARES-REINVESTED> 95,071
<NET-CHANGE-IN-ASSETS> 7,755,041
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (930,245)
<GROSS-ADVISORY-FEES> (23,128)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (135,094)
<AVERAGE-NET-ASSETS> 23,140,168
<PER-SHARE-NAV-BEGIN> 9.960
<PER-SHARE-NII> .540
<PER-SHARE-GAIN-APPREC> (.010)
<PER-SHARE-DIVIDEND> (.540)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.950
<EXPENSE-RATIO> .840
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 071
<NAME> FRANKLIN BOND FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR<F2>
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> AUG-03-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 34,084,825
<INVESTMENTS-AT-VALUE> 34,384,313
<RECEIVABLES> 3,618,432
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38,002,745
<PAYABLE-FOR-SECURITIES> 2,035,372
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 146,787
<TOTAL-LIABILITIES> 2,182,159
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 35,166,264
<SHARES-COMMON-STOCK> 408,284
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 172,883
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 175,522
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 305,917
<NET-ASSETS> 35,820,586
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 334,080
<OTHER-INCOME> 0
<EXPENSES-NET> (16,708)
<NET-INVESTMENT-INCOME> 317,372
<REALIZED-GAINS-CURRENT> 175,522
<APPREC-INCREASE-CURRENT> 305,917
<NET-CHANGE-FROM-OPS> 798,811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,709)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 428,859
<NUMBER-OF-SHARES-REDEEMED> (21,120)
<SHARES-REINVESTED> 545
<NET-CHANGE-IN-ASSETS> 35,820,586
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (24,877)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (63,120)
<AVERAGE-NET-ASSETS> 23,739,237
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .120
<PER-SHARE-GAIN-APPREC> .300
<PER-SHARE-DIVIDEND> (.050)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.370
<EXPENSE-RATIO> .500<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1>EXPENSE RATIO EXCLUDING WAIVER AND PAYMENTS BY AFFILIATE IS 1.29%. THESE
RATIOS ARE ANNUALIZED.
<F2>FOR THE PERIOD AUGUST 3, 1998 (EFFECTIVE DATE) TO OCTOBER 31,1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 073
<NAME> FRANKLIN BOND FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR<F2>
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> AUG-03-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 34,084,825
<INVESTMENTS-AT-VALUE> 34,384,313
<RECEIVABLES> 3,618,432
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38,002,745
<PAYABLE-FOR-SECURITIES> 2,035,372
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 146,787
<TOTAL-LIABILITIES> 2,182,159
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 35,166,264
<SHARES-COMMON-STOCK> 3,043,142
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 172,883
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 175,522
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 305,917
<NET-ASSETS> 35,820,586
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 334,080
<OTHER-INCOME> 0
<EXPENSES-NET> (16,708)
<NET-INVESTMENT-INCOME> 317,372
<REALIZED-GAINS-CURRENT> 175,522
<APPREC-INCREASE-CURRENT> 305,917
<NET-CHANGE-FROM-OPS> 798,811
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (140,700)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,061,438
<NUMBER-OF-SHARES-REDEEMED> (30,728)
<SHARES-REINVESTED> 12,432
<NET-CHANGE-IN-ASSETS> 35,820,586
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (24,877)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (63,120)
<AVERAGE-NET-ASSETS> 23,739,237
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .120
<PER-SHARE-GAIN-APPREC> .310
<PER-SHARE-DIVIDEND> (.050)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.380
<EXPENSE-RATIO> .250<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
<FN>
<F1>EXPENSE RATIO EXCLUDING WAIVER AND PAYMENTS BY AFFILIATE IS 1.04%. THESE
RATIOS ARE ANNUALIZED.
<F2>FOR THE PERIOD AUGUST 3, 1998 (EFFECTIVE DATE) TO OCTOBER 31, 1998.
</FN>
</TABLE>
