As filed with the Securities and Exchange Commission on February 27, 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. 22 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24 (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)
[x] on March 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a) of rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Adjustable Rate Securities Portfolios (the Master Funds) have executed
this registration statement.
Title of Securities Being Registered:
Shares of Beneficial Interest:
Franklin Global Government Income Fund - Class I
Franklin Global Government Income Fund - Class II
Franklin Global Government Income Fund - Advisor Class
Franklin Short-Intermediate U.S.
Government Securities Fund - Class I
Franklin Short-Intermediate U.S.
Government Securities Fund - Advisor Class
Franklin Convertible Securities Fund - Class I
Franklin Convertible Securities Fund - Class II
Franklin Adjustable U.S. Government Securities Fund
Franklin Adjustable Rate Securities Fund
Franklin Equity Income Fund - Class I
Franklin Equity Income Fund - Class II
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
Franklin Global Government Income Fund - Class I & II
Franklin Short-Intermediate U.S. Government Securities Fund - Class I
Franklin Convertible Securities Fund - Class I & II
Franklin Equity Income Fund - Class I & II
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How Does
the Fund Measure Performance?"
4. General Description "How Is the Trust Organized?"; "How
of Registrant Does the Fund Invest Its Assets?";
"What Are the Risks of Investing in
the Fund?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive From the Fund?"; "How
Taxation Affects the Fund and Its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being Offered "How Do I Buy Shares?"; "May I
Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or "May I Exchange Shares for Shares
Repurchase of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
Franklin Adjustable U.S. Government Securities Fund
Franklin Adjustable Rate Securities Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How Does
the Fund Measure Performance?"
4. General Description "How Is the Trust Organized?"; "How
of Registrant Does the Fund Invest Its Assets?";
"What Are the Risks of Investing in
the Fund?"
5. Management of the Fund "Who Administers the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive From the Fund?"; "How
Taxation Affects the Fund and Its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being Offered "How Do I Buy Shares?"; "May I
Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or "May I Exchange Shares for Shares
Repurchase of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
Franklin Global Government Income Fund - Advisor Class
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How Does the
Fund Measure Performance?"
4. General Description "How Is the Trust Organized?"; "How
of Registrant Does the Fund Invest Its Assets?";
"What Are the Risks of Investing in
the Fund?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and "How Is the Trust Organized?";
Other Securities "Services to Help You Manage Your
Account"; "What Distributions Might I
Receive From the Fund?"; "How
Taxation Affects the Fund and Its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of Another
Fund?"; "Transaction Procedures and
Special Requirements"; "Services to
Help You Manage Your Account";
"Useful Terms and Definitions"
8. Redemption or "May I Exchange Shares for Shares of
Repurchase Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures and
Special Requirements"; "Services to
Help You Manage Your Account";
"Useful Terms and Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
Franklin Global Government Income Fund - Class I & II
Franklin Short-Intermediate U.S. Government Securities Fund - Class I
Franklin Convertible Securities Fund - Class I & II
Franklin Equity Income Fund - Class I & II
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies "How Does the Fund Invest Its
Assets?"; "Investment Restrictions"
14. Management of the Registrant "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees"; "Investment
Holders of Securities Management and Other Services";
"Miscellaneous Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How Does the Fund Buy Securities for
Practices Its Portfolio?"
18. Capital Stock and Other Securities Not Applicable
19. Purchase, Redemption and Pricing "How Do I Buy, Sell and Exchange
of Securities Being Offered Shares?"; "How Are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How Does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
Franklin Adjustable U.S. Government Securities Fund
Franklin Adjustable Rate Securities Fund
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objective "How Does the Fund Invest Its
Assets?"; "Investment Restrictions"
14. Management of the Fund "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees"; "Investment
Holders of Securities Management and Other Services";
"Miscellaneous Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How Does the Fund Buy Securities for
Practices Its Portfolio?"
18. Capital Stock and Other Securities Not Applicable
19. Purchase, Redemption and Pricing "How Do I Buy, Sell and Exchange
of Securities Being Offered Shares?"; "How Are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How Does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
Franklin Global Government Income Fund - Advisor Class
Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objective "How Does the Fund Invest Its
Assets?"; "Investment Restrictions"
14. Management of the Fund "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees"; "Investment
Holders of Securities Management and Other Services";
"Miscellaneous Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"
17. Brokerage Allocation and Other "How Does the Fund Buy Securities for
Practices Its Portfolio?"
18. Capital Stock and Other Securities Not Applicable
19. Purchase, Redemption and Pricing "How Do I Buy, Sell and Exchange
of Securities Being Offered Shares?"; "How Are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How Does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN INVESTORS SECURITIES TRUST
MARCH 1, 1998
INVESTMENT STRATEGY
GLOBAL INCOME
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
INVESTMENT STRATEGY
INCOME
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
This prospectus describes Class I and Class II shares of the Franklin Global
Government Income Fund (the "Global Fund"), the Franklin Convertible
Securities Fund (the "Convertible Fund"), and the Franklin Equity Income
Fund (the "Equity Fund") and Class I shares of the Franklin
Short-Intermediate U.S. Government Securities Fund (the "Short-Intermediate
Fund"), each of which may individually or together be referred to as the
"Fund(s)." This prospectus contains information you should know before
investing in the Fund. Please keep it for future reference.
The Global Fund and the Short-Intermediate Fund currently offer another class
of shares with a different sales charge and expense structure, which affects
performance. This class is described in a separate prospectus. For more
information, contact your investment representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I
and, if offered, Class II shares, dated March 1, 1998, which may be amended
from time to time. It includes more information about the Fund's procedures
and policies. It has been filed with the SEC and is incorporated by reference
into this prospectus. For a free copy or a larger print version of this
prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN INVESTORS SECURITIES TRUST
THE CONVERTIBLE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN
NON-INVESTMENT GRADE BONDS OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE
COMMONLY KNOWN AS "JUNK BONDS." THEIR DEFAULT AND OTHER RISKS ARE GREATER
THAN THOSE OF HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING IN THE FUND. PLEASE SEE "WHAT ARE THE RISKS OF
INVESTING IN THE FUND?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary 2
Financial Highlights 4
How Does the Fund Invest Its Assets? 10
What Are the Risks of Investing in the Fund? 30
Who Manages the Fund? 36
How Does the Fund Measure Performance? 41
How Taxation Affects the Fund and Its Shareholders 42
How Is the Trust Organized? 45
ABOUT YOUR ACCOUNT
How Do I Buy Shares? 46
May I Exchange Shares for Shares of Another Fund? 55
How Do I Sell Shares? 58
What Distributions Might I Receive From the Fund? 61
Transaction Procedures and Special Requirements 62
Services to Help You Manage Your Account 67
What If I Have Questions About My Account? 69
GLOSSARY
Useful Terms and Definitions 70
APPENDIX
Description of Ratings 72
FRANKLIN
INVESTORS
SECURITIES
TRUST
MARCH 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal
year ended October 31, 1997. The Fund's actual expenses may vary.
SHORT-
INTERMEDIATE CONVERTIBLE EQUITY GLOBAL
FUND FUND FUND FUND
A.SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge
(as a percentage of Offering Price) 4.25% 2.25% 4.50% 4.50%
Paid at time of purchase++ 4.25% 2.25% 4.50% 4.50%
Paid at redemption++++ None None None None
Exchange Fee (per transaction)* $5.00 $5.00 $5.00 $5.00
CLASS II
Maximum Sales Charge
(as a percentage of Offering Price) 1.99% N/A 1.99% 1.99%
Paid at time of purchase+++ 1.00% N/A 1.00% 1.00%
Paid at redemption++++ 0.99% N/A 0.99% 0.99%
Exchange Fee (per transaction)* $5.00 N/A $5.00 $5.00
B.ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Management Fees 0.60% 0.56% 0.57% 0.53%
Rule 12b-1 Fees** 0.10% 0.08% 0.26%1 0.25%
Other Expenses 0.20% 0.14% 0.18% 0.19%
Total Fund Operating Expenses 0.90% 0. 78% 1.01% 0.97%
Class II
Management Fees 0.60% N/A 0.57% 0.53%
Rule 12b-1 Fees** 0.65% N/A 0.99% 1.00%
Other Expenses 0.20% N/A 0.18% 0.19%
Total Fund Operating Expenses 1.45% N/A 1.74% 1.72%
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------
Global Fund - Class I $ 51 $ 70 $ 90 $149
Global Fund - Class II $ 44 $ 65 $ 98 $190
Short-Intermediate Fund $ 30 $ 47 $ 65 $117
Convertible Fund - Class I $ 55 $ 76 $ 98 $163
Convertible Fund - Class II $ 37 $ 64 $103 $213
Equity Fund - Class I $ 54 $ 75 $ 96 $159
Equity Fund - ClassII $ 37 $ 64 $102 $211
For the same Class II investment, you would pay projected expenses of $34
for the Global Fund, $28 for the Convertible Fund, and $27 for the Equity
Fund if you did not sell your shares at the end of the first year. Your
projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its
Rule 12b-1 fees are higher. Over time you may pay more for Class II shares.
Please see "How Do I Buy Shares? - Choosing a Share Class."
++++A Contingent Deferred Sales Charge may apply to any Class II purchase if
you sell the shares within 18 months and to Class I purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class I shares without a front-end sales charge. The charge is 1% of
the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. The number in the table shows the charge as a percentage
of Offering Price. While the percentage is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount paid by you would be the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
**These fees may not exceed .15% for Global Fund - Class I, .10% for
Short-Intermediate Fund, .25% for Convertible Fund - Class I, and Equity Fund
- - Class I, .65% for Global Fund - Class II, and 1.00% for Convertible Fund -
Class II, and Equity Fund - Class II. The combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more
than the economic equivalent of the maximum front-end sales charge permitted
under the NASD's rules.
***Assumes a Contingent Deferred Sales Charge will not apply.
1The 12b-1 expense ratio is calculated based on the Fund's fiscal year ended
October 31, 1997. The 12b-1 expense ratio for the Fund's 12b-1 plan year
ended January 31, 1997 did not exceed .25%.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P, the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual
Report to Shareholders for the fiscal year ended October 31, 1997. The Annual
Report to Shareholders also includes more information about the Fund's
performance. For a free copy, please call Fund Information.
GLOBAL FUND
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED OCTOBER 31, YEAR ENDED JANUARY 31,
1997 1996 1995 1994 1993++ 1993 1992 1991 1990 1989+
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $8.65 $8.31 $8.06 $9.33 $8.61 $9.39 $9.34 $9.58 $10.39 $10.00
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .60 .61 .67 1.30 .58 .83 .86 1.05 1.11 .66
Net realized and unrealized gain (loss) (.22) .33 .29 (1.81) .72 .70 .25 (.17) (.80) .30
---------------------------------------------------------------------------------------
Total from
investment operations .38 .94 .96 (.51) 1.30 .13 1.11 .88 .31 .96
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.61) (.60) (.64) (.08) (.58) (.71) (.90) (1.11) (1.12) (.56)
In excess of net investment income (.01) - - - - - - - - -
Net realized gains - - - (.08) - (.08) (.16) (.01) - (.01)
Tax return of capital - - (.07) (.60) - (.12) - - - -
------------------------------------------------------------------------------------
Total distributions (.62) (.60) (.71) (.76) (.58) (.91) (1.06) (1.12) (1.12) (.57)
----------------------------------------------------------------------------------------
Net Asset Value, end of year $8.41 $8.65 $8.31 $8.06 $9.33 $8.61 $9.39 $9.34 $9.58 $10.39
=======================================================================================
Total return* 4.31% 11.80% 12.65% (5.72%) 15.14% 1.08% 12.15% 9.27% 2.69% 9.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $118.3 $137.6 $165.0 $187.2 $195.6 $154 $78.9 $29.7 $12.4 $5.6
Ratios to average
net assets:
Expenses .90% .85% .96% .89% .77%** .72% .50% .25% .03% -
Expenses excluding waiver
and payments by affiliate - - - - - .73% .80% .87% .96% 1.71%
Net investment income 6.97% 7.68% 8.29% 8.54% 6.74%** 7.08% 7.87% 11.80% 11.97% 9.92%
Portfolio turnover rate 193.30% 139.71% 103.49% 80.69% 67.36% 49.20% 155.40% 72.21% 41.34% 2.05%
</TABLE>
GLOBAL FUND (CONTINUED)
CLASS II
YEAR ENDED OCTOBER 31,
1997 1996 1995+++
---------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $8.65 $8.31 $8.03
--------------------------------
Income from investment operations:
Net investment income .55 .56 .31
Net realized and unrealized gain (loss) (.22) .33 .30
--------------------------------
Total from investment operations .33 .89 .61
--------------------------------
Less distributions from:
Net investment income (.56) (.55) (.30)
In excess of net investment income (.01) - -
Tax return of capital - - (.03)
---------------------------------
Total distributions (.57) (.55) (.33)
=================================
Net Asset Value, end of year $8.41 $8.65 $8.31
Total return* 3.74% 11.19% 7.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $4,473 $3,700 $1,193
Ratios to average net assets:
Expenses 1.46% 1.40% 1.54%**
Net investment income 6.43% 7.17% 7.41%**
Portfolio turnover rate 193.30% 139.71% 103.49%
SHORT-INTERMEDIATE FUND
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED OCTOBER 31, YEAR ENDED JANUARY 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993++ 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value,
beginning of year $10.28 $10.35 $10.03 $10.80 $10.57 $10.39 $10.30 $10.16 $10.12 $10.38
-----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .57 .58 .56 .49 .38 .57 .58 .76 .78 .78
Net realized and unrealized gain (loss) .02 (.08) .31 (.70) .25 .43 .37 .25 .10 (.30)
Total from investment operations .59 .50 .87 (.21) .63 1.00 .95 1.01 .88 .48
Less distributions from:
Net investment
income (.58) (.57) (.55) (.47) (.39) (.57) (.79) (.86) (.84)(.74)
Net realized gains - - - (.09) (.01) (.26) (.08) - - -
----------------------------------------------------------------------------------------
Total distributions (.58) (.57) (.55) (.56) (.40) (.82) (.86) (.87) (.84) (.74)
----------------------------------------------------------------------------------------
Net Asset Value, end of year $10.29 $10.28 $10.35 $10.03 $10.80 $10.57 $10.39 $10.30 $10.16 $10.12
========================================================================================
Total return* 5.88% 4.97% 8.90% (1.99%) 5.90% 10.01% 9.44% 10.19% 8.78% 4.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $192 $196 $208 $225 $274 $235 $164 $49 $31 $29
Ratios to average net assets:
Expenses .78% .74% .73% .65% .55%** .56% .71% .48% .27% .25%
Expenses excluding - - - .68% .63%** .65% - .74% .77% .79%
waiver and payments
by affiliate
Net investment income 5.51% 5.64% 5.42% 4.75% 4.75%** 5.40% 5.90% 7.56% 7.60% 7.72%
Portfolio turnover rate 40.56% 72.62% 56.34% 99.09% 31.71% 78.96% 102.05% 71.44% 151.36%111.75%
</TABLE>
CONVERTIBLE FUND
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED OCTOBER 31, YEAR ENDED JANUARY 31,
---------------------------------------------------------
1997 1996 1995 1994 1993++ 1993 1992 1991 1990 1989
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $13.45 $12.73 $12.34 $12.79 $11.44 $10.48 $8.53 $9.31 $9.60 $9.10
--------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .61 .58 .59 .45 .61 .44 .78 .80 .78
Net realized and unrealized gain (loss) 2.15 1.39 1.10 (.33) 1.41 1.03 2.19 (.73) (.40) .40
------------------------------------------------------------------------------------
Total from investment operations 2.79 2.00 1.68 .26 1.86 1.64 2.63 0.05 0.41 1.18
------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.60) (.60) (.59) (.59) (.51) (.68) (.68) (.83) (.70) (.68)
Net realized gains (.90) (.68) (.70) (.12) - - - - - -
---------------------------------------------------------------------------------
Total distributions (1.50) (1.28) (1.29) (.71) (.51) (.68) (.68) (.83) (.70) (.68)
--------------------------------------------------------------------------------------
Net Asset Value, end of year $14.74 $13.45 $12.73 $12.34 $12.79 $11.44 $10.48 $8.53 $9.31 $9.60
======================================================================================
Total return* 22.47% 16.71% 15.18% 2.07% 16.50% 16.12% 31.50% 0.37% 3.85% 13.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in millions) $213 $131 $83.5 $66.9 $47.4 $28.3 $20.3 $15.8 $14.8 $17.3
Ratios to average net assets:
Expenses 1.01% 1.02% 1.03% .84% .25%** .25% .26% .25% .24% .25%
Expenses excluding waiver
and payments by affiliate - - - .92% .86%** .81% .94% .84% .89% .90%
Net investment income 4.81% 4.79% 4.82% 4.84% 5.25%** 6.01% 6.84% 8.90% 8.25% 8.27%
Portfolio turnover rate 141.49% 129.83% 108.64% 68.39% 31.05% 60.00% 64.90% 45.42%30.87% 70.75%
Average commission rate paid*** $.0534 $.0495 - - - - - - - -
</TABLE>
CONVERTIBLE FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS II
YEAR ENDED OCTOBER 31,
1997 1996 1995++++
----------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $13.41 $12.71 $13.06
----------------------------------------------------------
Income from investment operations:
Net investment income .54 .51 .07
Net realized and unrealized gain (loss) 2.13 1.40 (.37)
-----------------------------------------------------------
Total from investment operations 2.67 1.91 (.30)
-----------------------------------------------------------
Less distributions from:
Net investment income (.50) (.53) (.05)
Net realized gains (.90) (.68) -
-----------------------------------------------------------
Total distributions (1.40) (1.21) (.05)
-----------------------------------------------------------
Net Asset Value, end of year $14.68 $13.41 $12.71
===========================================================
Total return* 21.54% 15.92% (2.33%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $35,282 $10,861 $209
Ratios to average net assets:
Expenses 1.74% 1.79% 1.60%**
Net investment income 4.04% 4.00% 3.64%**
Portfolio turnover rate 141.49% 129.83% 108.64%
Average commission rate paid*** $.0534 $.0495 -
</TABLE>
EQUITY FUND
<TABLE>
<CAPTION>
CLASS I
YEAR ENDED OCTOBER 31, YEAR ENDED JANUARY 31,
1997 1996 1995 1994 1993++ 1993 1992 1991 1990 1989+
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $16.41 $15.19 $14.14$14.91 $13.46 $12.31 $10.64 $11.53 $11.00 $10.00
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .64 .63 .62 .60 .66 .42 .72 .75 .56
----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3.23 1.63 1.27 (.36) 1.44 1.31 1.97 (.80) .53 .89
-----------------------------------------------------------------------------------
Total from investment operations 3.87 2.27 1.90 .26 2.04 1.97 2.39 (.08) 1.28 1.45
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.65) (.61) (.72) (.50) (.68) (.66) (.74) (.66) (.37)
Net realized gains (.33) (.40) (.24) (.31) (.09) (.14) (.06) (.07) (.09) (.08)
------------------------------------------------------------------------------------
Total distributions (.97) (1.05) (.85)(1.03) (.59) (.82) (.72) (.81) (.75) (.45)
------------------------------------------------------------------------------------
Net Asset Value, end of year $19.31 $16.41 $15.19$14.14 $14.91 $13.46 $12.31 $10.64 $11.53 $11.00
=====================================================================================
Total return* 24.40% 15.39% 14.10% 1.83% 15.27% 16.23% 22.76% (.92%) 11.43% 14.61%
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of year (in millions) $352.6 $247.0 $168.9 $92.8 $42.2 $26.1 $16.1 $10.1 $7.2 $2.5
Ratios to average net assets:
Expenses .97% .98% 1.00% .77% .25%** .25% .25% .18% - -
Expenses excluding waiver and payments
by affiliate - - 1.02% .95% .87%** .81% .84% .83% .83% .73%
Net investment income 3.62% 4.11% 4.44% 4.53% 5.86%** 5.18% 5.77% 6.60% 6.23% 5.78%**
Portfolio turnover rate 29.04% 24.15% 27.86%39.51% 19.33% 31.05% 40.59% 26.99% 33.11% 11.34%
Average commission rate paid*** $.0488 $.0514 - - - - - - - -
</TABLE>
EQUITY FUND (CONTINUED)
<TABLE>
<CAPTION>
CLASS II
YEAR ENDED OCTOBER 31,
1997 1996 1995++++
--------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $16.38 $15.19 $15.38
Income from investment operations:
Net investment income .50 .52 .05
Net realized and unrealized gain (loss) 3.22 1.63 (.19)
-------------------------------
Total from investment operations 3.72 2.15 (.14)
-------------------------------
Less distributions from:
Net investment income (.51) (.56) (.05)
Net realized gains (.33) (.40) -
-------------------------------
Total distributions (.84) (.96) (.05)
-------------------------------
Net Asset Value, end of year $19.26 $16.38 $15.19
===============================
Total return* 23.40% 14.53% (.93%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $45,277 $18,227 $386
Ratios to average net assets:
Expenses 1.72% 1.73% 1.99%**
Net investment income 2.78% 3.33% 3.57%**
Portfolio turnover rate 29.04% 24.15% 27.86%
Average commission rate paid*** $.0488 $.0514 -
</TABLE>
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE, AND IS NOT ANNUALIZED. PRIOR TO MAY 1, 1994, DIVIDENDS FROM NET
INVESTMENT INCOME WERE REINVESTED AT THE OFFERING PRICE
**ANNUALIZED.
***RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO OCTOBER 31,
1996, DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
+FOR THE PERIOD MARCH 15, 1988 (EFFECTIVE DATE) TO JANUARY 31, 1989.
++FOR THE NINE MONTHS ENDED OCTOBER 31, 1993.
+++FOR THE PERIOD MAY 1, 1995 (EFFECTIVE DATE) TO OCTOBER 31, 1995.
++++FOR THE PERIOD OCTOBER 1, 1995 (EFFECTIVE DATE) TO OCTOBER 31, 1995.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Global Fund's investment objective is to provide high current income,
consistent with preservation of capital, with capital appreciation as a
secondary consideration. The Short-Intermediate Fund's investment objective
is to provide as high a level of current income as is consistent with prudent
investing while seeking preservation of shareholders' capital. The
Convertible Fund's investment objective is to maximize total return,
consistent with reasonable risk, by seeking to optimize capital appreciation
and high current income under varying market conditions. The Equity Fund's
investment objective is to maximize total return through emphasis on high
current income and long-term capital appreciation, consistent with reasonable
risk. The objective is a fundamental policy of the Fund and may not be
changed without shareholder approval. Of course, there is no assurance that
the Fund will achieve its objective.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
GLOBAL FUND
The Global 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 Global Fund considers securities issued by central banks
that are guaranteed by their national governments to be government securities.
The Global 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 Global 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." A detailed description of these financial
transactions is included below. The risk considerations involved in global
investing generally are included under "What Are the Risks of Investing in
the Fund?"
As a global fund, the Global Fund may invest in securities issued in any
currency and may hold foreign currency. Under normal circumstances, the
Global Fund invests at least 65% of its assets in government securities of
issuers located in at least three countries, one of which may be the U.S.
Securities of issuers within a given country may be denominated in the
currency of another country, or in multinational currency units such as the
European Currency Unit ("ECU").
Under normal economic conditions, the Global 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 Global 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 Global Fund may invest in debt securities with varying maturities. Under
current market conditions, it is expected that the dollar-weighted average
maturity of the Global Fund's investments will not exceed 15 years.
Generally, the portfolio's average maturity will be shorter when Advisers
expects interests rates worldwide or in a particular country to rise, and
longer when Advisers expects interest rates to fall.
The Global 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. The SAI contains additional
information concerning these three latter categories. 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 Global 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 Global 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 Global Fund may, in addition, invest in debt
securities denominated in ECU of an issuer in any country (including
supranational issuers). The Global Fund is further authorized to invest in
"semi-governmental securities," which are debt securities issued by entities
owned by either a national, state, or equivalent government or are
obligations of a government jurisdiction that are not backed by its full
faith and credit and general taxing powers.
The Global 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 Global Fund will
evaluate a country's economic and political conditions such as inflation
rate, growth prospects, global trade patterns, and government policies.
The Global Fund invests its assets principally within Australia, Canada,
Japan, New Zealand, the U.S., and Western Europe, and in securities
denominated in the currencies of these countries or denominated in
multinational currency units such as the ECU. The Global Fund may also
acquire securities and currency in less developed countries and in developing
countries, which may involve greater exposure to the risks ordinarily
associated with foreign investing. See "What Are the Risks of Investing in
the Fund? - Foreign Securities." Advisers does not currently expect the
Global Fund's investments in less developed and developing countries to
exceed 30% of its net assets.
The Global Fund will not invest in securities of foreign countries issued
without stock certificates or comparable stock documents. The Global Fund
does not consider securities which it acquires outside the U.S. and which are
publicly traded in the U.S., on a foreign securities exchange, or in a
foreign securities market to be illiquid assets so long as the Fund acquires
and holds the securities with the intention of reselling the securities in
the foreign trading market, the Fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign market, and current
market quotations are readily available.
BANK SECURITIES. The 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 Global Fund to acquire an interest in
a loan from a financially strong borrower, which the Fund could not do
directly. The SAI contains further information on loan participations.
LOWER-RATED DEBT OBLIGATIONS. The Global Fund may invest in higher-yielding,
higher-risk, lower-rated debt obligations that are rated at least B by
Moody's or S&P or, if unrated, are at least of comparable quality as
determined by Advisers. As of December 31, 1997, the Global Fund held 20.6%
of its assets in lower-rated investments and may in the future increase this
percentage, but such investments will be less than 35% of the Fund's net
assets. U.S. rating agencies do not rate many debt obligations of foreign
issuers, especially developing market issuers, and their selection depends on
Advisers' internal analysis. Securities rated BB or lower by S&P or Ba or
lower by Moody's (sometimes referred to as "junk bonds") are regarded as
predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation
and therefore involve special risks. Please see "What Are the Risks of
Investing in the Fund? - High Yield Securities" and the appendix in this
prospectus for a discussion of the ratings categories.
CURRENCY TECHNIQUES AND HEDGING. The Global Fund intends to pursue its
investment objective through investments in options, futures, options on
futures, and forward contracts. Investment in these securities is not a
fundamental policy of the Global Fund, and may be changed at the discretion
of the Board without prior notice or shareholder approval. While there are no
specific limits on the Global 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 Global 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 Global 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 Global 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 Global 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 Global 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 Global 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 Global
Fund to enter into forward contracts is limited only to the extent forward
contracts would, in the opinion of Advisers, impede portfolio management or
the ability of the Fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates also may
result in poorer overall performance for the Global Fund than if it had not
entered into such contracts.
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 Global 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 Global Fund's position, the Fund may forfeit
the entire amount of the premium plus related transaction costs. The SAI
includes a further discussion of the use, risks, and costs of options on
foreign currencies.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Global Fund may enter
into contracts for the purchase or sale for future delivery of debt
securities ("futures contracts") and may buy or write options to buy or sell
futures contracts traded on U.S. and foreign exchanges ("options on futures
contracts"). These investment techniques are designed only to hedge against
anticipated future changes in interest rates that otherwise might either
adversely affect the value of the Global Fund's portfolio securities or
adversely affect the prices of securities that the Fund intends to buy at a
later date. Should interest rates move in an unexpected manner, the Global
Fund may not achieve the anticipated benefits of futures contracts or options
on futures contracts or may realize a loss.
The Board has adopted the requirement that 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. The SAI contains a further
discussion of the use, risks, and costs of futures contracts and options on
futures contracts.
During periods when Advisers 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, including (i) U.S. Treasury obligations, which differ
only in their interest rates, maturities, and times of issuance: U.S.
Treasury bills (maturity of one year or less), U.S. Treasury notes
(maturities of one to 10 years), and U.S. Treasury bonds (generally
maturities of greater than 10 years), all of which are backed by the full
faith and credit of the U.S. government; and (ii) obligations issued or
guaranteed by U.S. government agencies or instrumentalities, some of which
are backed by the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage Association),
some of which are supported by the right of the issuer to borrow from the
U.S. government (e.g., obligations of Federal Home Loan Banks), and some of
which are backed only by the credit of the issuer itself (e.g., obligations
of the Student Loan Marketing Association).
When investing for defensive purposes is appropriate, such as during periods
of adverse market conditions or when relative yields in other securities are
not deemed attractive, the Global Fund may invest part or all of its assets
in cash (including foreign currency) or cash-equivalent, short-term
obligations, including, but not limited to, the following: CDs, commercial
paper, short-term notes, obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities, and repurchase
agreements secured thereby. In particular, for defensive purposes a larger
portion of the Global Fund's assets may be invested in U.S. dollar
denominated obligations to reduce the risks inherent in non-dollar
denominated assets.
SHORT-INTERMEDIATE FUND
The Short-Intermediate Fund intends to invest up to 100% of its net assets in
U.S. government securities. As a fundamental policy, the Short-Intermediate
Fund must invest at least 65% of its net assets in U.S. government
securities. SEC guidelines require at least 65% of the Short-Intermediate
Fund's total assets be invested in U.S. government securities, and the Fund
will follow that policy notwithstanding its fundamental policy. It is the
investment policy of the Short-Intermediate Fund (which may be changed upon
notice to shareholders) to maintain the average dollar weighted maturity of
its portfolio in a range of two to five years. Within this range, the
Short-Intermediate Fund intends to emphasize an average weighted maturity of
31/2 years or less.
The Short-Intermediate 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.
Since inception, the Short-Intermediate Fund has invested its assets solely
in direct obligations of the U.S. Treasury and in repurchase agreements
collateralized by U.S. Treasury obligations. 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.
The Short-Intermediate 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 Short-Intermediate 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 Short-Intermediate 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 Short-Intermediate
Fund may also realize capital gains or losses upon the sale of securities.
ZERO COUPON BONDS. The Short-Intermediate Fund may, consistent with its other
policies, invest in zero coupon bonds issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Zero coupon bonds are debt
obligations 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. A zero coupon security pays no interest to its
holder during its life and its value (above its cost to the
Short-Intermediate Fund) consists of the difference between its face value at
maturity and its cost. These investments experience greater volatility in
market value due to changes in interest rates than debt obligations that
provide for regular payments of interest. The Short-Intermediate Fund will
accrue income on such investments for tax and accounting purposes, as
required, which is distributable to shareholders and which, because no cash
is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
CONCENTRATION. The Short-Intermediate Fund will not invest more than 25% of
the value of its total assets in any one particular industry.
CONVERTIBLE FUND
The Convertible 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 Convertible Fund's
policies permit investment in convertible and fixed-income securities without
restrictions as to a specified range of maturities.
The Convertible 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.
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.
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.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security, but if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the Convertible Fund (or the Equity Fund) uses the same criteria to
rate a convertible debt security that it uses to rate a more conventional
debt security, a convertible preferred stock is treated like a preferred
stock for the Fund's financial reporting, credit rating, and investment
limitation purposes. A preferred stock is subordinated to all debt
obligations in the event of insolvency, and an issuer's failure to make a
dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date,
so that its market value is dependent on the issuer's business prospects for
an indefinite period of time. In addition, distributions from preferred stock
are dividends, rather than interest payments, and are usually treated as such
for corporate tax purposes.
The Convertible Fund (and the Equity Fund) may invest in convertible
preferred stocks that offer enhanced yield features, such as Preferred Equity
Redemption Cumulative Stocks ("PERCS"), which provide an investor, such as
the Fund, with the opportunity to earn higher dividend income than is
available on a company's common stock. PERCS are preferred stocks that
generally feature a mandatory conversion date, as well as a capital
appreciation limit, which is usually expressed in terms of a stated price.
Most PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, PERCS convert
after three years into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is
trading at a price above that set by the capital appreciation limit. The
amount of that fractional share of common stock is determined by dividing the
price set by the capital appreciation limit by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. If called early, however, the issuer
must pay a call premium over the market price to the investor. This call
premium declines at a preset rate daily, up to the maturity date.
The Convertible Fund (and the Equity Fund) may also invest in other enhanced
convertible securities. These include but are not limited to ACES
(Automatically Convertible Equity Securities), PEPS (Participating Equity
Preferred Stock), PRIDES (Preferred Redeemable Increased Dividend Equity
Securities), SAILS (Stock Appreciation Income Linked Securities), TECONS
(Term Convertible Notes), QICS (Quarterly Income Cumulative Securities), and
DECS (Dividend Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS,
TECONS, QICS, and DECS all have the following features: they are issued by
the company, the common stock of which will be received in the event the
convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high
current income with some prospect of future capital appreciation, they are
typically issued with three to four-year maturities, they typically have some
built-in call protection for the first two to three years, and upon maturity
they will automatically convert to either cash or a specified number of
shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described above in which the Convertible Fund may invest,
consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Convertible Fund (or the Equity Fund). The
Fund may have difficulty disposing of such securities because there may be a
thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and the Fund's ability
to dispose of particular securities, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event, such as the
deterioration in the 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 (like the Equity Fund),
however, intends 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 Convertible 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 Advisers
expects normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows the
Convertible Fund to combine components representing distinct issuers, or to
combine a fixed income security with a call option on a stock index, when
Advisers determines that such a combination would better promote the
Convertible 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.
LOWER-RATED SECURITIES. When investing in convertible securities and
nonconvertible fixed-income debt securities, the Convertible Fund may buy
both securities rated by nationally recognized statistical rating agencies or
in unrated securities, depending upon prevailing market and economic
conditions. Please see the appendix in this prospectus for a description of
these ratings.
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 Convertible Fund's assets but will
not be a determining or limiting factor. Rather than relying principally on
the ratings assigned by rating services, the investment analysis of
securities being considered for the Convertible Fund's portfolio may also
include, among other things, consideration of relative values, based on such
factors as anticipated cash flow, interest or dividend coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements, and the issuer's changing
financial condition and public recognition thereof.
Higher yields are ordinarily available from securities in the lower-rated
categories or from unrated securities of comparable quality. Convertible
securities generally fall within the lower-rated categories of rating
agencies, that is, securities rated Baa or lower by Moody's or BBB or lower
by S&P. The Convertible 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
Advisers. To the extent the Convertible 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. (A
breakdown of the securities' ratings is included under "What Are the Risks of
Investing in the Fund? - Asset Composition Table.") The Convertible Fund will
not invest in securities Advisers believes involve excessive risk. In the
event a ratings service changes the rating on an issue held in the
Convertible Fund's portfolio or the security goes into default, Advisers will
consider that event in its evaluation of the overall investment merits of
that security but will not necessarily sell the security.
WARRANTS. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time. The Convertible
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.
U.S. GOVERNMENT SECURITIES. The Convertible Fund may invest in securities
that are obligations of the U.S. government, its agencies or
instrumentalities. U.S. government securities include, but are not limited
to, U.S. Treasury bonds, notes and bills, Treasury Certificates of
Indebtedness, and securities issued by instrumentalities of the U.S.
government. The Convertible Fund may invest in participation certificates of
the Government National Mortgage Association ("GNMAs"). GNMAs are guaranteed
as to principal and interest by GNMA, which guarantee is backed by the full
faith and credit of the U.S. government. The market value of GNMAs may
fluctuate based upon factors such as changing interest rates. In addition,
the mortgages underlying GNMAs are subject to repayment prior to maturity,
and in times of falling mortgage interest rates premature repayments may be
more likely. To the extent GNMAs held by the Convertible 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.
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 Convertible Fund does not immediately deliver the securities sold
and does not receive the proceeds from the sale. The Convertible Fund is said
to have a short position in the securities sold until it delivers the
securities sold, at that time it receives the proceeds of the sale. To secure
its obligation to deliver the securities sold short, the Convertible 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 Convertible
Fund may make a short sale when Advisers believes the price of the stock may
decline and when, for tax or other reasons, Advisers does not want to
currently sell the stock or convertible security it owns. In this case, any
decline in the value of the Convertible Fund's portfolio securities would be
reduced by a gain in the short sale transaction. Conversely, any increase in
the value of the Convertible Fund's portfolio securities would be reduced by
a loss in the short sale transaction. The Convertible 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.
CONCENTRATION. The Convertible 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 Equity Fund pursues its investment objective by investing at least 65% of
its net assets (except when maintaining a temporary defensive position) in a
broadly diversified portfolio of common and preferred stocks, including
convertibles, offering current dividend yields above the average of the
market defined by the Standard & Poor's(R) 500 Index. The Equity Fund may
invest up to 35% of its net assets in other securities which, in the
aggregate, it considers to be consistent with its investment objective. Other
investments may include fixed-income securities convertible into common and
preferred stocks, covered call options, put options, U.S. government
securities, securities of foreign issuers, corporate bonds, high grade
commercial paper, bankers' acceptances, and other short-term instruments.
When maintaining a temporary defensive position, the 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.
CURRENT INVESTMENT STRATEGY. The Equity 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 Equity Fund the potential for greater principal stability.
The Equity Fund evaluates the common stock dividend yields of many
financially strong companies as compared to the average dividend yield of the
general stock market as defined by the Standard & Poor's(R) 500 Index. This
results in a unique relative yield range for each company that in turn
provides a discipline for determining whether a stock is attractive for
purchase or sale.
Because high relative dividend yield as defined above is frequently
accompanied by a lower stock price, the Equity 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 Equity Fund may then reinvest
the proceeds into other relatively high dividend yielding issues. This
approach may allow the Equity 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 Equity Fund's fundamental objective: above-average
dividend growth prospects, low price to normalized earnings (projected
earnings under normal operating conditions), to cash flow, to book value,
and/or to realizable liquidation value.
The Equity 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.
FOREIGN SECURITIES. The Equity Fund may invest in foreign securities. Please
see "How Does the Fund Invest Its Assets - Other Investment Policies of the
Fund" for information about the Equity Fund's investments in foreign
securities.
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.
CONVERTIBLE SECURITIES. The Equity Fund may invest in convertible securities
and enhanced convertible securities. These securities are discussed in detail
above under "How Does the Fund Invest Its Assets? - Convertible Fund -
Convertible Securities."
There may be additional types of convertible securities not specifically
referred to in the discussion above which may be similar to those described
in which the Equity Fund may invest, consistent with its objective and
policies. Presently, the Equity Fund does not intend to invest more than 15%
of its assets in convertible securities.
DEBT SECURITIES. 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. Instruments rated B by S&P
or Ba by Moody's generally lack characteristics of desirable investments and
are judged to have predominantly speculative elements. The 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. Further details on these
ratings are included in the appendix.
In its investment analysis of debt securities being considered for the Equity
Fund's portfolio, rather than relying principally on the ratings assigned by
rating services, Advisers may also consider, among other things,
consideration of relative values based on such factors as anticipated cash
flow, interest coverage, asset coverage, earnings prospects, the experience
and managerial strength of the issuer, responsiveness to changes in interest
rates and business conditions, debt maturity schedules and borrowing
requirements, and the issuer's changing financial condition and public
recognition thereof.
U.S. GOVERNMENT SECURITIES. The Equity Fund may invest in U.S. government
securities including, but not limited to, U.S. Treasury bonds, notes, and
bills, Treasury certificates of indebtedness, and securities issued by
instrumentalities of the U.S. government.
OTHER INVESTMENT POLICIES OF THE FUND
OPTIONS ON SECURITIES. 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.
In seeking to achieve its investment objective, 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, which are
described under "What Are the Risks of Investing in the Fund?" 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.
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.
Options are generally considered "derivative securities." See the SAI for a
further discussion of the use, risks, and costs of options.
FOREIGN SECURITIES. See "How Does the Fund Invest Its Assets? - Global Fund"
for a discussion of the Global Funds' investments in foreign securities. The
Convertible Fund may invest, without restriction, in foreign securities. The
Equity Fund may also invest in 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"),
which are certificates issued by U.S. banks representing the right to receive
securities of a foreign issuer deposited with that bank or a correspondent
bank. Each Fund may, however, buy the securities of foreign issuers directly
in foreign markets so long as, in Advisers' judgment, an established public
trading market exists. The Convertible Fund presently has no intention of
investing more than 30% of its net assets in foreign securities not publicly
traded in the U.S. The Equity Fund may invest up to 30% of its net assets in
foreign securities not publicly traded in the U.S.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents. 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. The holding of foreign securities may be
limited by the Convertible Fund to avoid investment in certain Passive
Foreign Investment Companies ("PFIC") and the imposition of a PFIC tax on the
Fund resulting from such investments. The Equity Fund may not invest more
than 10% of its assets in securities of developing markets. Please see "What
Are the Risks of Investing in the Fund? - Foreign Securities."
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Board and subject to the following conditions, 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
Global 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. The
lending of securities is a common practice in the securities industry. Each
Fund may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing cash collateral in
short-term interest-bearing obligations or by receiving a loan premium from
the borrower. Under the securities loan agreement, the Fund continues to be
entitled to all dividends or interest on any loaned securities. As with any
extension of credit, there are risks of delay in recovery and loss of rights
in the collateral should the borrower of the security fail financially.
WHEN-ISSUED SECURITIES. 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. The Fund may engage in repurchase transactions. 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. The securities subject
to resale are held on behalf of the Fund by a custodian bank approved by the
Board. 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 by Advisers.
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.
Advisers will evaluate the creditworthiness of these entities prior to
engaging in such transactions, under the general supervision of the Board.
Except as otherwise indicated, the general investment practices described
above may be changed without shareholder approval, and no assurances can be
given that they will in any event accomplish the results intended.
BORROWING. The 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. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the Fund has valued them.
PORTFOLIO TURNOVER. The Global Fund's portfolio turnover rate for the fiscal
years ended October 31, 1996, and October 31, 1997, was 139.71%, and 193.30%,
respectively. The high portfolio turnover rate for the fiscal year ended
October 31, 1997, was due to changing market conditions and a higher level of
redemptions than in previous years.
The Convertible Fund's portfolio turnover rate was 141.49% for the fiscal
year ended October 31, 1997, and 129.83% for the fiscal year ended October
31, 1996. The higher portfolio turnover rate for the fiscal year ended
October 31, 1997, was due to a determination by Advisers that in light of the
generally rising securities market in 1997 the Fund should take profits.
Additionally, the market experienced significant new issuances of
convertibles, many with terms (yield, premium, call protection, downside
protection) that were more attractive than existing positions held by the
Fund. The Fund took advantage of this opportunity to upgrade its holdings.
High portfolio turnover may increase the Global Fund's and the Convertible
Fund's transaction costs.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional
investment restrictions that limit its activities to some extent. Some of
these restrictions may only be changed with shareholder approval. For a list
of these restrictions and more information about the Fund's investment
policies, please see "How Does the Fund Invest Its Assets?" and "Investment
Restrictions" in the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and
in the SAI is considered at the time the Fund makes an investment. The Fund
is generally not required to sell a security because of a change in
circumstances.
The foregoing permissible investments and practices are subject to the
fundamental policy of the Short-Intermediate Fund, which can only be changed
with shareholder approval, that the Fund will only purchase securities and
engage in trading practices that are permitted, without limitation, to
national banks, federal savings and loan associations, and federal credit
unions. Please see the SAI for more details on the Short-Intermediate Fund's
policies regarding eligible federal credit union investments.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The value of your shares will increase as the value of the securities owned
by the Fund increases and will decrease as the value of the Fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the Fund. In addition to the factors that affect
the value of any particular security that the Fund owns, the value of Fund
shares may also change with movements in the stock and bond markets as a
whole.
HIGH YIELD 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, Advisers 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. Under the Code and
U.S. Treasury regulations, a Fund may have to accrue income on defaulted
securities and distribute the income to shareholders for tax purposes, even
though the Fund is not currently receiving interest or principal payments on
the defaulted securities. 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 Advisers' judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, Advisers 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, 1997.
GLOBAL FUND
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 76.7%
AA+ 1.6%
AA 0.3%
AA- 0.8%
A+* 4.7%
A 0.6%
BB+ 0.3%
BB** 10.1%
BB- 4.0%
B+ 0.9%
*4.4% are unrated and have been included in the A+ rating category.
**0.5% are unrated and have been included in the BB rating category.
CONVERTIBLE FUND
Average Weighted
MOODY'S RATING PERCENTAGE OF ASSETS
Aa 1.09%
A 5.21%
Baa 9.35%
Ba 12.17%
B* 27.67%
Caa 0.25%
As of October 31, 1997, 1.92% of the securities in the Fund's portfolio were
unrated by Moody's and deemed by Advisers to be comparable to securities
rated A by Moody's; 10.13% were unrated and deemed to be comparable to
securities rated Ba by Moody's, and 15.59% were unrated and deemed to be
comparable to securities rated B by Moody's.
NON-DIVERSIFICATION RISK. Because the Global Fund is non-diversified, there
is no restriction under the Investment Company Act of 1940 on the percentage
of its assets that it may invest at any time in the securities of any issuer.
However, the Global Fund intends to comply with the diversification and other
requirements of the Code applicable to regulated investment companies, so
that the Fund will not be subject to U.S. federal income tax on the income
and capital gain that it distributes to shareholders. Nevertheless, the
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 CURRENCY. 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.
FOREIGN SECURITIES. You should carefully consider the risks involved in
investment in foreign securities. Each of the risks described below may be
heightened to the extent that the Fund invests in securities of developing or
emerging markets. These risks include political, social, or economic
instability in the country of the issuer; the difficulty of predicting
international trade patterns; the possibility of the imposition of exchange
controls; expropriation; limits on removal of currency or other assets;
nationalization of assets; foreign withholding; and income taxation and
foreign trading practices (including higher trading commissions, custodial
charges, and delayed settlements). Foreign securities may be subject to
greater fluctuations in price than securities issued by U.S. corporations or
issued or guaranteed by the U.S. government, its instrumentalities or
agencies. The markets on which foreign securities trade may have less volume
and liquidity and may be more volatile than securities markets in the U.S. In
addition, there may be less publicly available information about a foreign
company than is contained in reports and reflected in ratings published for
an U.S. domiciled company. Foreign companies generally are not subject to
uniform accounting, auditing, and financial reporting standards comparable to
those applicable to U.S. domestic companies. There is generally less
government regulation of securities exchanges, brokers, and listed companies
abroad than in the U.S. Restrictions and controls on investment in the
securities markets of some countries may have an adverse effect on the
availability and costs to the Fund of investments in those countries.
Transaction costs on foreign securities exchanges may be higher than in the
U.S., and foreign securities settlements may, in some instances, be subject
to delays and related administrative uncertainties. Confiscatory taxation or
diplomatic developments could also affect investment in those countries.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in companies in developed
countries. These risks include (i) less social, political, and economic
stability; (ii) the smaller size of the markets for these securities and the
currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) the lack of publicly
available information, including reports of payments of dividends or interest
on outstanding securities; (iv) certain national policies that may restrict
the Fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (v) foreign
taxation; (vi) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vii) restrictions that may make it difficult or impossible for the
Fund to vote proxies, exercise shareholder rights, pursue legal remedies, and
obtain judgments in foreign courts; (viii) the risk of uninsured loss due to
lost, stolen, or counterfeit stock certificates; and (ix) possible losses
through the holding of securities in domestic and foreign custodial banks and
depositories.
To the extent the Fund invests in foreign securities, the operating expense
ratio of the Fund can be expected to be higher than that of an investment
company investing exclusively in U.S. securities because of the additional
expenses of the Fund, such as custodial costs, valuation costs, and
communication costs, although they are expected to be similar to expenses of
other investment companies investing in a mix of U.S. securities and
securities of one or more foreign countries.
DEBT SECURITIES. Debt securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to factors such as
interest rate sensitivity, market perception of the creditworthiness of the
issuer, and general market liquidity (market risk). Advisers considers both
credit risk and market risk in making investment decisions as to corporate
debt obligations for the Equity Fund. Debt obligations in which the Equity
Fund may invest will tend to decrease in value when prevailing interest rates
rise and increase in value when prevailing interest rates fall. Generally,
long-term debt obligations are more sensitive to interest rate fluctuations
than short-term obligations. Because investments in debt obligations are
interest rate sensitive, the Equity Fund's performance may be affected by
Advisers' ability to anticipate and respond to fluctuations in market
interest rates, to the extent of the Fund's investment in debt obligations.
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.
INTEREST RATE, CURRENCY AND MARKET RISK. The Global Fund and the Equity Fund
are subject to interest rate, currency, and market risk. The
Short-Intermediate Fund is subject to interest rate risk, and the Convertible
Fund is subject to interest rate and market risk. To the extent the Fund
invests in debt securities, changes in interest rates in any country where
the Fund is invested will affect the value of the Fund's portfolio and its
share price. Rising interest rates, which often occur during times of
inflation or a growing economy, are likely to have a negative effect on the
value of the Fund's shares. To the extent the Fund invests in common stocks,
a general market decline in any country where the Fund is invested may cause
the value of what the Fund owns, and thus the Fund's share price, to decline.
Changes in currency valuations may also affect the price of Fund shares. The
value of stock markets, currency valuations and interest rates throughout the
world have increased and decreased in the past. These changes are
unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
The Board also monitors the Fund to ensure no material conflicts exist among
the Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $221 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the Fund's Code of Ethics.
Under an agreement with Advisers, Investment Counsel is the sub-advisor of
the Global Fund. Investment Counsel provides Advisers with investment
management advice and assistance. The agreement provides for Investment
Counsel to furnish, subject to Advisers' discretion, a portion of the
investment advisory services for which Advisers is responsible pursuant to
the management agreement. These responsibilities may include managing a
portion of the Global Fund's investments and supplying research services.
Investment Counsel's activities are subject to the Board's review and
control, as well as Advisers' instruction and supervision.
MANAGEMENT TEAM. The teams responsible for the day-to-day management of the
Funds' portfolios are:
GLOBAL FUND: Thomas J. Dickson since 1993, Neil S. Devlin since 1994, and
Thomas Latta since 1995.
SHORT-INTERMEDIATE FUND: Jack Lemein, David Capurro, and Tom Runkel since the
Fund's inception.
CONVERTIBLE FUND: Edward Jamieson since inception and Mitchell Cone since
1994.
EQUITY FUND: Frank Felicelli since the Fund's inception, Douglas Barton since
1991, and Ernst Schleimer since 1995.
Douglas Barton
Vice President of Advisers
Mr. Barton is a Chartered Financial Analyst and holds a Master of Business
Administration degree from California State University in Hayward and a
Bachelor of Science degree from California State University in Chico. Mr.
Barton joined the Franklin Templeton Group in July 1988.
David Capurro
Vice President of Advisers
Mr. Capurro holds a Master of Business Administration degree and a Bachelor
of Science degree in Business Administration from California State University
at Hayward. Mr. Capurro has been with the Franklin Templeton Group since 1985.
Mitchell Cone
Portfolio Manager of Advisers
Mr. Cone is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in Economics and Sociology from the University of California at Berkeley. He
has been in the securities industry since 1985 and with the Franklin
Templeton Group since 1992. He is a member of several securities
industry-related committees and associations.
Neil S. Devlin
Chief Investment Officer and Executive Vice President of Templeton Global
Bond Managers, a division of Investment Counsel.
Mr. Devlin holds a BA in economics and philosophy from Brandeis University,
and is a Chartered Financial Analyst. Before joining the Templeton
organization in 1987, he was a portfolio manager and bond analyst with
Constitution Capital Management of Boston. Prior to that, Mr. Devlin was a
bond trader and research analyst for the Bank of New England. Mr. Devlin
currently directs investment strategies in both the developed and emerging
fixed income markets. He also manages numerous Franklin Templeton mutual
funds as well as corporate pension accounts.
Thomas J. Dickson
Portfolio Manager of Investment Counsel
Mr. Dickson is currently a portfolio manager for funds in the Franklin
Templeton Group of Funds. He holds a BS in managerial economics from the
University of California at Davis. Prior to joining the Templeton
organization in 1994, Mr. Dickson worked as a fixed-income analyst and trader
for Advisers. Mr. Dickson's current research responsibilities include country
coverage of Australia, Canada, Japan and New Zealand.
Frank Felicelli
Vice President of Advisers
Mr. Felicelli is a Chartered Financial Analyst and has a Master of Business
Administration degree from Golden Gate University. He earned a Bachelor of
Arts degree in Economics from the University of Illinois. He has been with
the Franklin Templeton Group since 1986. He is a member of several securities
industry-related associations.
Edward B. Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Master degree in Accounting and Finance from the
University of Chicago Graduate School of Business and a Bachelor of Arts
degree from Bucknell University. He has been with the Franklin Templeton
Group since 1987. Mr. Jamieson is a member of several securities
industry-related committees and associations.
Thomas Latta
Vice President of Templeton Global Bond Managers, a division of Investment
Counsel
Mr. Latta attended the University of Missouri and New York University. Mr.
Latta is a Chartered Financial Analyst, and a member of the Association for
Investment Management and Research and the Institute of Chartered Financial
Analysts. Before joining the Templeton organization in 1991, Mr. Latta worked
as a portfolio manager with Forester & Hairston, a Houston-based global fixed
income investment management firm. Prior to that, Mr. Latta spent seven years
with Merrill Lynch, Pierce, Fenner & Smith Incorporated where, among other
assignments, he was part of an investment advisory team to the Saudi Arabian
Monetary Authority. While at Merrill Lynch, Mr. Latta also acted as an
advisor to investment managers concerning the modeling and application of
interest rate immunization strategies in fixed income portfolios. Mr. Latta's
current research responsibilities include the core European markets.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in Finance from the University
of Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry related associations.
Howard M. McEldowney
Portfolio Manager of Advisers
Mr. McEldowney has been generally involved with investment strategy of the
Equity Fund's portfolio since its inception. Mr. McEldowney holds a Master of
Business Administration degree from Columbia University School of Business
and a Bachelor of Arts degree from Harvard University. Mr. McEldowney has
been in the securities industry since 1964 and with the Franklin Templeton
Group since April 1984.
Tom Runkel
Vice President of Advisers
Mr. Runkel is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Santa Clara. He earned his
Bachelor of Arts degree in Political Science from the University of
California at Davis. Mr. Runkel has been with the Franklin Templeton Group
since 1985. He is a member of several securities industry-related committees
and associations.
Ernst P. Schleimer
Portfolio Manager of Advisers
Mr. Schleimer holds a Master of Business Administration from the Stanford
School of Business and a Bachelor of Arts in Economics from Tufts University.
Mr. Schleimer has been with the Franklin Templeton Group since 1994, and
prior to that worked as a consultant at KPMG Peat Marwick.
MANAGEMENT FEES. During the fiscal year ended October 31, 1997, management
fees paid to Advisers, as a percentage of average monthly net assets, and
total expenses, including fees paid to Advisers, were as follows:
TOTAL
MANAGEMENT OPERATING EXPENSES
FEES CLASS I CLASS II
Global Fund 0.60% 0.90% 1.45%
Short-Intermediate Fund 0.56% 0.78% N/A
Convertible Fund 0.57% 1.01% 1.74%
Equity Fund 0.53% 0.97% 1.72%
During the same period, Advisers paid Investment Counsel a sub-advisory fee
totaling 0.32% of the average daily net assets of the Global Fund. This fee
is not a separate expense of the Global Fund but is paid by Advisers from the
management fees it receives from the Fund.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the Fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
THE RULE 12B-1 PLANS
Class I and (except for the Short-Intermediate Fund) Class II have separate
distribution plans or "Rule 12b-1 Plans" under which they may pay or
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.
Payments by the Global Fund, the Short-Intermediate Fund, the Convertible
Fund and the Equity Fund under the Class I plan may not exceed .15%, .10%,
.25%, and .25% per year, respectively, of Class I's average daily net assets.
All distribution expenses over this amount will be borne by those who have
incurred them. During the first year after certain Class I purchases made
without a sales charge, Securities Dealers may not be eligible to receive the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Global Fund, the Convertible Fund, and the
Equity Fund may pay Distributors up to .50%, .75%, and .75% per year,
respectively, of Class II's average daily net assets to pay Distributors or
others for providing distribution and related services and bearing certain
Class II expenses. All distribution expenses over this amount will be borne
by those who have incurred them. During the first year after a purchase of
Class II shares, Securities Dealers may not be eligible to receive this
portion of the Rule 12b-1 fees associated with the purchase.
The Global Fund, the Convertible Fund, and the Equity Fund may also pay a
servicing fee of up to .15%, .25%, and .25% per year, respectively, of Class
II's average daily net assets under the Class II plan. This fee may be used
to pay Securities Dealers or others for, among other things, helping to
establish and maintain customer accounts and records, helping with requests
to buy and sell shares, receiving and answering correspondence, monitoring
dividend payments from the Fund on behalf of customers, and similar servicing
and account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance.
Commonly used measures of performance include total return, current yield and
current distribution rate. Performance figures are usually calculated using
the maximum sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for
each class shows the income per share earned by that class. The current
distribution rate shows the dividends or distributions paid to shareholders
of a class. This rate is usually computed by annualizing the dividends paid
per share during a certain period and dividing that amount by the current
Offering Price of the class. Unlike current yield, the current distribution
rate may include income distributions from sources other than dividends and
interest received by the Fund.
The investment results of each class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a
more detailed description of how the Fund calculates its performance figures,
please see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT
OF 1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE.
BECAUSE MANY OF THESE CHANGES ARE COMPLEX, THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUND'S INVESTMENTS
The Fund invests your money in the stocks, bonds, and other securities that
are described in the section "How Does the Fund Invest Its Assets?" Special
tax rules may apply in determining the income and gains that the Fund earns
on its investments. These rules may, in turn, affect the amount of
distributions that the Fund pays to you. Please see the SAI for a discussion
of these special tax rules.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally
pays no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains
from the Fund's investments in foreign stocks and bonds. These taxes will
reduce the amount of the Fund's distributions to you, but, depending upon the
amount of the Fund's assets that are invested in foreign securities, may be
passed through to you as a foreign tax credit on your income tax return. The
Fund may also invest in the securities of foreign companies that are "passive
foreign investment companies." These investments in PFICs may cause the Fund
to pay income taxes and interest charges. If possible, the Fund will adopt
strategies to avoid PFIC taxes and interest charges.
TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. Distributions from the Fund, whether you receive them in cash
or in additional shares, are generally subject to income tax. The Fund will
send you a statement in January of the current year that reflects the amount
of ordinary dividends, capital gain distributions, and non-taxable
distributions you received from the Fund in the prior year. This statement
will include distributions declared in December and paid to you in January of
the current year, but which are taxable as if paid on December 31 of the
prior year. The IRS requires you to report these amounts on your income tax
return for the prior year. The Fund's statement for the prior year will tell
you how much of your capital gain distribution represents 28% rate gain
property. The remainder of the capital gain distribution represents 20% rate
gain. How Does the Fund Earn Income and Gains?
The Fund earns dividends and interest (the Fund's "income") on its
investments. When the Fund sells a security for a price that is higher than
it paid, it has a gain. When the Fund sells a security for a price that is
lower than it paid, it has a loss. If the Fund has held the security for more
than one year, the gain or loss will be a long-term capital gain or loss. If
the Fund has held the security for one year or less, the gain or loss will be
a short-term capital gain or loss. The Fund's gains and losses are netted
together, and if the Fund has a net gain (the Fund's "gains"), that gain will
generally be distributed to you.
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the Fund's income and gains
on its investments in stocks, bonds, and other securities. The Fund's income
and short-term capital gains are paid to you as ordinary dividends. The
Fund's long-term capital gains are paid to you as capital gain distributions.
If the Fund pays you an amount in excess of its income and gains, this excess
will generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the Fund's distributions to you
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a Section 401(k) plan or IRA, are
generally tax-deferred; this means that you are not required to report Fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the Global
Fund or the Short-Intermediate Fund's distributions will qualify for the
corporate dividends-received deduction. However, corporate investors may be
entitled to a dividends-received deduction on a portion of the ordinary
dividends they receive from either the Convertible Fund or the Equity Fund.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your
income tax return. If you exchange Fund shares held for 90 days or less and
pay no sales charge, or a reduced sales charge, for the new shares, all or a
portion of the sales charge you paid on the purchase of the shares you
exchanged is not included in their cost for purposes of computing gain or
loss on the exchange. If you hold your shares for six months or less, any
loss you have will be treated as a long-term capital loss to the extent of
any capital gain distributions received by you from the Fund. All or a
portion of any loss on the redemption or exchange of your shares will be
disallowed by the IRS if you purchase other shares in the Fund within 30 days
before or after your redemption or exchange. What is a Redemption?
A redemption is a sale by you to the Fund of some or all of your shares in
the Fund. The price per share you receive when you redeem Fund shares may be
more or less than the price at which you purchased those shares. An exchange
of shares in the Fund for shares of another Franklin Templeton Fund is
treated as a redemption of Fund shares and then a purchase of shares of the
other fund. When you redeem or exchange your shares, you will generally have
a gain or loss, depending upon whether the basis in your shares is more or
less than your cost or other basis in the shares. Call Fund Information for a
free shareholder Tax Infor-mation Handbook if you need more information in
calculating the gain or loss on the redemption or exchange of your shares
FOREIGN TAXES. If more than 50% of the value of the Fund's assets consists of
foreign securities, the Fund may elect to pass through to you the amount of
foreign taxes it paid. If the Fund makes this election, your year-end
statement will show more taxable income than was actually distributed to you.
However, you will be entitled either to deduct your share of such taxes in
computing your taxable income or to claim a foreign tax credit for such taxes
against your U.S. federal income tax. Your year-end statement, showing the
amount of deduction or credit available to you, will be distributed to you in
January along with other shareholder information records including your Fund
Form 1099-DIV.
WHAT IS A FOREIGN TAX CREDIT?
A foreign tax credit is a tax credit for the amount of taxes imposed by a
foreign country on earnings of the Fund. When a foreign company in which the
Fund invests pays a dividend to the Fund, the dividend will generally be
subject to a withholding tax. The taxes withheld in foreign countries create
credits that you may use to offset your U.S. federal income tax.
The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you
must have $600 or less in joint return foreign taxes ($300 or less on a
single return), all of which are reported to you on IRS Form 1099-DIV. This
simplified procedure applies only for calendar years 1998 and beyond, and is
not available for 1997.
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends paid
from interest earned on direct obligations of the U.S. government, subject to
certain restrictions. The Fund will provide you with information at the end
of each calendar year on the amount of such dividends that may qualify for
exemption from reporting on your individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions, and gains arising from redemptions or exchanges
of your Fund shares. Fund shares held by the estate of a non-U.S. investor
may be subject to U.S. estate tax. You may wish to contact your tax advisor
to determine the U.S. and non-U.S. tax consequences of your investment in the
Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the Fund and gains arising from redemptions or exchanges of your
Fund shares will generally be subject to state and local income tax. The
holding of Fund shares may also be subject to state and local intangibles
taxes. You may wish to contact your tax advisor to determine the state and
local tax consequences of your investment in the Fund.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that
you provide your taxpayer identification number ("TIN"), certify that it is
correct, and certify that you are not subject to backup withholding under IRS
rules. If you fail to provide a correct TIN or the proper tax certifications,
the Fund is required to withhold 31% of all the distributions (including
ordinary dividends and capital gain distributions) and redemption proceeds
paid to you. The Fund is also required to begin backup withholding on your
account if the IRS instructs the Fund to do so. The Fund reserves the right
not to open your account, or, alternatively, to redeem your shares at the
current net asset value, less any taxes withheld, if you fail to provide a
correct TIN, or the proper tax certifications, or if the IRS instructs the
Fund to begin backup withholding on your account.
WHAT IS A BACKUP WITHHOLDING?
Backup withholding occurs when the Fund is required to withhold and pay over
to the IRS 31% of your distributions and redemption proceeds. You can avoid
backup withholding by providing the Fund with your TIN, and by completing the
tax certifications on your shareholder application that you were asked to
sign when you opened your account. However, if the IRS instructs the Fund to
begin backup withholding, it is required to do so even if you provided the
Fund with your TIN and these tax certifications, and backup withholding will
remain in place until the Fund is instructed by the IRS that it is no longer
required
This tax discussion is for general information only. You should consult your
own tax advisors concerning the federal, state, local, or foreign tax
consequences of an investment in the Fund. Please see "Additional Information
on Distribution and Taxes" in the SAI for a more complete discussion of these
rules and related matters, The tax treatment to you of dividends, capital
gain distributions, foreign taxes paid, and income taxes withheld is also
discussed in a free Franklin Templeton Tax Information Handbook, which you
may request by contacting Fund Information.
HOW IS THE TRUST ORGANIZED?
Each Fund, except for the Global Fund, is a diversified series of Franklin
Investors Securities Trust "(the Trust"), an open-end management investment
company, commonly called a mutual fund. The Global Fund is a non-diversified
series of the Trust. The Trust was organized as a Massachusetts business
trust on December 22, 1986, and is registered with the SEC. As of January 1,
1997, the Global Fund and the Short-Intermediate Fund each began offering a
new class of shares designated Franklin Global Government Income Fund -
Advisor Class and Franklin Short-Intermediate U.S. Government Securities Fund
- - Advisor Class, respectively. All shares outstanding before the offering of
Advisor Class shares have been designated Franklin Global Government Income
Fund - Class I, Franklin Global Government Income Fund - Class II, and
Franklin Short-Intermediate U.S. Government Securities Fund - Class I. The
Convertible Fund and the Equity Fund each offer two classes of shares:
Franklin Convertible Securities Fund - Class I, Franklin Convertible
Securities Fund - Class II, Franklin Equity Income Fund - Class I, and
Franklin Equity Income Fund - Class II. All shares outstanding before the
offering of Class II shares are considered Class I shares. Additional series
and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
Fund and have the same voting and other rights and preferences as any other
class of the Fund for matters that affect the Fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters 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.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or 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.
As of February 2, 1998, Franklin Templeton Trust Company, as trustee for
ValuSelect, owned of record and beneficially more than 25% of the outstanding
Advisor Class shares of Global Fund, and Templeton Funds Trust Company owned
of record and beneficially more than 25% of the outstanding Advisor Class
shares of Short-Intermediate Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
o To open your account: $100*
o To add to your account: $25*
*We may waive these minimums for retirement plans. We also reserve the
right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to send
an additional application to add privileges later. PLEASE ALSO INDICATE WHICH
CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL
AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. (The Short-Intermediate
Fund does not offer Class II shares.) It is important that we receive a
signed application since we will not be able to process any redemptions from
your account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
By Mail For an initial investment:
Return the application to the Fund with your check made
payable to the Fund.
For additional investments:
Send a check made payable to the Fund. Please include your
account number on the check.
- ------------------------------------------------------------------------------
By Wire 1. Call Shareholder Services or, if that number is busy,
call 1-650/312-2000 collect, to receive a wire control
number and wire instructions. You need a new wire control
number every time you wire money into your account. If you
do not have a currently effective wire control number, we
will return the money to the bank, and we will not credit
the purchase to your account.
2. For initial investments you must also return your signed
shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before 1:00
p.m. Pacific time and the bank receives the wired funds and
reports the receipt of wired funds to the Fund by 3:00 p.m.
Pacific time, we will credit the purchase to your account
that day. If we receive your call after 1:00 p.m. or the
bank receives the wire after 3:00 p.m., we will credit the
purchase to your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
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. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I
o Higher front-end sales charges than Class II shares. There are several ways
to reduce these charges, as described below. There is no front-end sales
charge for purchases of $1 million or more.*
o Contingent Deferred Sales Charge on purchases of $1 million or more sold
within one year
o Lower annual expenses than Class II shares
CLASS II
o Lower front-end sales charges than Class I shares
o Contingent Deferred Sales Charge on purchases sold within 18 months
o Higher annual expenses than Class I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, any purchase of $1 million or more is
automatically invested in Class I shares. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the tables below. The sales charge for Class II shares is
1% and, unlike Class I, does not vary based on the size of your purchase.
GLOBAL FUND
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
SHORT INTERMEDIATE U.S. GOVERNMENT FUND
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 2.25% 2.31% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.27% 1.00%
$500,000 but less than $1,000,000 1.00% 1.01% 0.85%
$1,000,000 or more* None None None
CONVERTIBLE FUND AND EQUITY FUND
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class II shares are limited to purchases below $1 million.
Please see "Choosing a Share Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include
this statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced
sales charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the Fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of shares.
Certain exceptions apply, however, to Class II shareholders who chose to
reinvest their distributions in Class I 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 Class I shares of the
Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of Fund shares and a new Contingency Period will
begin. We will, however, credit your Fund account with additional shares
based on the Contingent Deferred Sales Charge you paid and the amount of
redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank CD,
you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date the CD matures, including any rollover.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, or the
Templeton Variable Products Series Fund. You should contact your tax advisor
for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
6. GLOBAL FUND AND CONVERTIBLE FUND ONLY: 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 contingent deferred sales charge when you redeemed your Class
A shares from a Templeton Global Strategy Fund, a Contingent Deferred Sales
Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with additional
shares based on the contingent deferred sales charge you 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.
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. AN ELIGIBLE GOVERNMENTAL AUTHORITY. Please consult your legal and
investment advisors to determine if an investment in the Fund is permissible
and suitable for you and the effect, if any, of payments by the Fund on
arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy Class I shares without a front-end sales charge.
Retirement plans that are not Qualified Retirement Plans, SIMPLEs or SEPs
must also meet the requirements described under "Group Purchases - Class I
Only" above to be able to buy Class I shares without a front-end 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 Contingent
Deferred Sales Charge 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. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 0.75% of the amount
invested in shares of the Global Fund and the Short-Intermediate Fund and up
to 1% of the amount invested in shares of the Convertible Fund and the Equity
Fund.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of Fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
Global Fund or the Convertible 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.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is
the only money fund exchange option available to Class II shareholders.
Unlike our other money funds, shares of Money Fund II may not be purchased
directly and no drafts (checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums. Some Franklin Templeton Funds, including
the Short-Intermediate Fund, do not offer Class II shares.
Method Steps to Follow
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates
for the shares you want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund. If you have never paid a sales charge on your
shares because, for example, they have always been held in a money fund, you
will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without
a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange
shares. Any shares subject to a Contingent Deferred Sales Charge at the time
of exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE. For accounts with shares subject to a
Contingent Deferred Sales Charge, we will first exchange any shares in your
account that are not subject to the charge. If there are not enough of these
to meet your exchange request, we will exchange shares subject to the charge
in the order they were purchased.
If you exchange Class I shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION
TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(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. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" (which are not offered by the
Convertible Fund or the Equity Fund) or "Class Z" shares. Because the
Convertible Fund and the Equity Fund do not currently offer an Advisor Class,
you may exchange Advisor Class shares of any Franklin Templeton Fund for
Class I shares of the Convertible Fund or the Equity Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Class I shares for Advisor
Class shares of that fund. Certain shareholders of Class Z shares of Franklin
Mutual Series Fund Inc. may also exchange their Class Z shares for Class I
shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions. If you
would like your redemption proceeds wired to a
bank account, your instructions should include:
The name, address and telephone number of
the bank where you want the proceeds sent
Your bank account number
The Federal Reserve ABA routing number
If you are using a savings and loan or
credit union, the name of the corresponding
bank and the account number
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts
may need to send additional documents.
Accounts under court jurisdiction may have
other requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services.
If you would like your redemption
proceeds wired to a bank account, other than an
escrow account, you must first sign up for the
wire feature. To sign up, send us written
instructions, with a signature guarantee. To
avoid any delay in processing, the instructions
should include the items listed in "By Mail"
above.
Telephone requests will be accepted:
If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call
Institutional Services to receive a copy.
If there are no share certificates issued
for the shares you want to sell or you have
already returned them to the Fund
Unless you are selling shares in a Trust
Company retirement plan account
Unless the address on your account was
changed by phone within the last 15 days
- If you do not want the ability to redeem by
phone to apply to your account, please let us
know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. 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 this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or
draft to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge 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.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end 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, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in Class
I shares, you can redeem up to $120,000 annually through a systematic
withdrawal plan free of charge. Likewise, if you maintain an annual balance
of $10,000 in Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Short-Intermediate Fund declares dividends from its net investment income
daily and pays them monthly on or about the last day of the month. The daily
allocation of net investment income begins on the day after we receive your
money or settlement of a wire order trade and continues to accrue through the
day we receive your request to sell your shares or the settlement of a wire
order trade.
Each Fund, except the Short-Intermediate Fund, declares dividends from its
net investment income monthly to shareholders of record on the first business
day before the 15th of the month and pays them on or about the last day of
that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of Class I
and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy Global Fund, Convertible Fund, or Equity Fund shares shortly
before the record date, please keep in mind that any distribution will lower
the value of the Fund's shares by the amount of the distribution and you will
then receive a portion of the price you paid back in the form of a taxable
distribution.
If you buy Short-Intermediate Fund shares shortly before the Fund deducts a
capital gain distribution from its Net Asset Value, please keep in mind that
you will receive a portion of the price you paid back in the form of a
taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers - Class I Only" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the Fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date (in the case of the Global Fund, the Convertible Fund, or the
Equity Fund) or the reinvestment date (in the case of the Short-Intermediate
Fund) for us to process the new option. For Trust Company retirement plans,
special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the Fund. Your redemption proceeds
from the Global Fund, the Convertible Fund, or the Equity Fund will not earn
interest between the time we receive the order from your dealer and the time
we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the Fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
Fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------------------------------------------------
Corporation Corporate Resolution
- ------------------------------------------------------------------------------
Partnership 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNT. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the Fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your
checking account to the Fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the Fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy
additional Class I shares. Your investments will continue automatically until
you instruct the Fund and your employer to discontinue the plan. To process
your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. If you choose to have the
money sent to a checking account, please see "Electronic Fund Transfers -
Class I Only" below. Once your plan is established, any distributions paid by
the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent
directly to a checking account. If the checking account is with a bank that
is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If you choose this option, please
allow at least fifteen days for initial processing. We will send any payments
made during that time to the address of record on your account.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
CODE NUMBER
CLASS I CLASS II
Global Fund 135 235
Short-Intermediate Fund 136 N/A
Convertible Fund 137 237
Equity Fund 139 239
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the Fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The Fund, Distributors and Advisers are also located at this
address. Investment Counsel is located at Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394-3091. You may also contact us by phone
at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement
Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager.
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Global Fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The
Short-Intermediate Fund offers two classes of shares, designated "Class I"
and "Advisor Class." The Convertible Fund and the Equity Fund each offer two
classes of shares, designated "Class I" and "Class II." The classes have
proportionate interests in the Fund's portfolio. They differ, however,
primarily in their sales charge and expense structures and/or Rule 12b-1
plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. Regardless of when during the month you
purchased shares, they will age one month on the last day of that month and
each following month.
CONTINGENT DEFERRED SALES Charge (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the Fund is a legally permissible investment and that can only buy shares of
the Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the Global Fund's
sub-advisor
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I of the Global Fund and 1% for
Class II; 2.25% for Class I of the Short-Intermediate Fund; and 4.50% for
Class I of the Convertible Fund and the Equity Fund and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - BONDS rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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.
However, the relative degree of safety 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.
FITCH'S
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, CDs, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
PROSPECTUS & APPLICATION
FRANKLIN INVESTORS
SECURITIES TRUST
MARCH 1, 1998
INVESTMENT STRATEGY
INCOME
FRANKLIN ADJUSTABLE U.S.GOVERNMENT SECURITIES FUND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
This prospectus describes the Franklin Adjustable U.S. Government Securities
Fund (the "Adjustable U.S. Government Fund") and the Franklin Adjustable
Rate Securities Fund (the "Adjustable Rate Securities Fund"), each of which
may individually or together be referred to as the "Fund(s)." The Prospectus
contains information you should know before investing in the Fund. Please
keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated March 1,
1998, which may be amended from time to time. It includes more information
about the Fund's procedures and policies. It has been filed with the SEC and
is incorporated by reference into this prospectus. For a free copy or a
larger print version of this prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN INVESTORS SECURITIES TRUST
Unlike most funds that invest directly in securities, the Adjustable U.S.
Government Fund seeks to achieve its investment objective by investing all of
its assets in shares of the U.S. Government Adjustable Rate Mortgage
Portfolio (the "Mortgage Portfolio"), and the Adjustable Rate Securities Fund
seeks to achieve its investment objective by investing all of its assets in
shares of the Adjustable Rate Securities Portfolio (the "Securities
Portfolio"). References to "the Portfolio" refer to each Portfolio
individually, unless the context indicates otherwise. The Portfolio is a
series of the Adjustable Rate Securities Portfolios. Its investment objective
is the same as the Fund's.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN INVESTORS SECURITIES TRUST
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights ............................................. 3
How Does the Fund Invest Its Assets? ............................. 6
What Are the Risks of Investing in the Fund? ..................... 19
Who Administers the Fund? ........................................ 22
How Does the Fund Measure Performance? ........................... 24
How Taxation Affects the Fund and Its Shareholders ............... 24
How Is the Trust Organized? ...................................... 27
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 28
May I Exchange Shares for Shares of Another Fund? ................ 35
How Do I Sell Shares? ............................................ 38
What Distributions Might I Receive From the Fund? ................ 41
Transaction Procedures and Special Requirements .................. 42
Services to Help You Manage Your Account ......................... 46
What If I Have Questions About My Account? ....................... 48
GLOSSARY
Useful Terms and Definitions ..................................... 49
Franklin Investors Securities Trust
March 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
Franklin Investors Securities Trust
ABOUT THE FUND
Expense Summary
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses, including its
proportionate share of the Portfolio's expenses, for the fiscal year ended
October 31, 1997. The Fund's actual expenses may vary.
ADJUSTABLE ADJUSTABLE
U.S. GOVERNMENT RATE SECURITIES
FUND FUND
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price) 2.25%++ 2.25%++
Deferred Sales Charge None+++ None+++
Exchange Fee (per transaction) $5.00* $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management and Administration Fees 0.50%** 0.50%**
Rule 12b-1 Fees 0.25%*** 0.25%***
Other Expenses of the Fund and
the Portfolio 0.18% 0.25%
Total Fund Operating Expenses 0.93%** 1.00%**
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Adjustable U.S. Government Fund $32**** $51 $73 $134
Adjustable Rate Securities Fund $32**** $54 $77 $142
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES
OR RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
SHOWN. The Fund pays its operating expenses. The effects of these
expenses are reflected in its Net Asset Value or dividends and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
+++A Contingent Deferred Sales Charge of 1% may apply to purchases of $1
million or more if you sell the shares within one year. A Contingent Deferred
Sales Charge may also apply to purchases by certain retirement plans that
qualify to buy shares without a front-end sales charge. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for details.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
** For the period shown, Advisers had agreed in advance to limit its
management fees. With this reduction, management fees of the Mortgage
Portfolio and the Securities Portfolio were 0.22% and 0.21%, respectively,
and administration fees of the Fund were 0.10%. Total operating expenses of
the Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund
were 0.75% and 0.81%, respectively.
***The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
The Board considered whether the total fees and expenses of the Fund and the
Portfolio would be more or less than if the Fund invested directly in the
types of securities held by the Portfolio. By investing all of its assets in
shares of the Portfolio, the Fund and other investment companies and
institutional investors are able to pool their assets. This may result in a
variety of operating economies. Accordingly, the Board concluded that the
total expenses of the Fund and the Portfolio were expected to be lower than
if the Fund invested directly in various types of securities. Of course,
there is no guarantee that asset growth and lower expenses will be achieved.
Advisers, however, has agreed in advance to limit expenses so that they will
not be higher than if the Fund invested directly in the types of securities
held by the Portfolio. Advisers may end this arrangement at any time upon
notice to the Board. For more information on the fees and expenses of the
Fund and the Portfolio, please see "Who Administers the Fund?"
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the
fiscal year ended October 31, 1997. The Annual Report to Shareholders also
includes more information about the Fund's performance. For a free copy,
please call Fund Information.
ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993*** 1993 1992 1991 1990 1989
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the year)
Net Asset Value,
beginning of year $9.37 $9.34 $9.20 $9.77 $9.86 $9.98 $9.99 $10.05 $10.07 $10.17
Income from investment
operations:
Net investment income .55 .56 .54 .35 .28 .51 .74 .88 .94 .82
Net realized & unrealized gain (loss) .10 .03 .14 (.61) (.09) (.11) .03 .07 .03 (.23)
------------------------------------------------------------------------------------
Total from investment operations .65 .59 .68 (.26) .19 .41 .77 .95 .97 .59
------------------------------------------------------------------------------------
Less distributions from net
investment income (.54) (.56) (.54) (.31) (.28) (.52) (.78) (1.01) (.99) (.69)
Distributions from capital gains - - - - - (.003) - - - -
------------------------------------------------------------------------------------
Total distributions (.54) (.56) (.54) (.31) (.28) (.53) (.78) (1.01) (.99) (.69)
Net Asset Value, end of year $9.48 $9.37 $9.34 $9.20 $9.77 $9.86 $9.98 $9.99 $10.05 $10.07
------------------------------------------------------------------------------------
Total return* 7.18% 6.54% 7.57% (2.65)% 1.99% 4.16% 7.96% 9.91% 10.16% 5.99%
RATIOS/SUPPLEMENTAL DATA
Net assets, end
of year (in millions) $335 $397 $509 $701 $1,814 $2,971 $3,513 $1,173 $82 $45
Ratios to average net assets:
Expenses .75%+ .69%+ .61%+ .42%+ .65%**+ 66%+ 68%+ .30% .39% .44%
Expenses excluding waiver
and payments by affiliate .93%+ .86%+ .86%+ .82%+ .79%**+ .80%+ .89%+ .82% .87% .96%
Net investment income 5.81% 5.87% 5.76% 3.67% 3.92%** 5.10% 7.10% 8.23% 9.03% 7.92%
Portfolio turnover rate 43.68% 23.52% 17.81% 5.99% 6.97% 30.36% 30.89% 96.50% 76.32% 48.39%
ADJUSTABLE RATE SECURITIES FUND
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993*** 19932 19921
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $9.87 $9.82 $9.70 $10.04 $10.03 $10.00 $10.00
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .54 .58 .45 .37 .60 -
Net realized & unrealized gain (loss) .09 .06 .12 (.34) .01 .03 -
-----------------------------------------------------------------------------
Total from investment operations .65 .60 .70 .11 .38 .63 -
-----------------------------------------------------------------------------
Less distributions from:
Net investment income (.56) (.55) (.58) (.45) (.37) (.60) -
Total distributions (.56) (.55) (.58) (.45) (.37) (.60) -
-----------------------------------------------------------------------------
Net Asset Value, end of year $9.96 $9.87 $9.82 $9.70 $10.04 $10.03 $10.00
=============================================================================
Total return* 6.75% 6.23% 7.57% 1.11% 3.83% 6.48% -
Ratios/supplemental data
Net assets, end of year (in 000's) $21,137 $15,707 $17,014 $24,564 $37,809 $12,521 -
Ratios to average net assets:
Expenses+ .81% .90% .70% .45% .11%** - -
Expenses excluding waiver
and payments by affiliate+ 1.00% 1.12% .99% .85% 1.01%** 1.91% -
Net investment income 5.64% 5.54% 5.82% 4.45% 4.69%** 5.84% -
Portfolio turnover rate 86.71% 41.67% 53.30% 84.67% 49.11% 48.95% -
</TABLE>
1For the period December 26, 1991 (effective date of registration) to January
31, 1992.
2For the year ended January 31, 1993.
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
**Annualized.
***For the nine months ended October 31, 1993.
+Includes the Fund's share of the Portfolio's allocated expenses.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a high level of current income,
consistent with lower volatility of principal. The Adjustable U.S. Government
Fund seeks to achieve its objective by investing all of its assets in the
Mortgage Portfolio, and the Adjustable Rate Securities Fund seeks to achieve
its investment objective by investing all of its assets in the Securities
Portfolio. The investment objective of the Portfolio is the same as the
Fund's. The investment policies of the Fund are also substantially similar to
the corresponding Portfolio's except, in all cases, the Fund may pursue its
policies by investing in an open-end management investment company with the
same investment objective and substantially similar policies and restrictions
as the Fund. Any additional exceptions are noted below.
The Fund buys shares of the Portfolio at Net Asset Value. An investment in
the Fund is an indirect investment in the corresponding Portfolio. The
investment objective of both the Fund and the Portfolio is fundamental and
may not be changed without shareholder approval. Of course, there is no
assurance that the Fund will achieve its objective.
TYPES OF SECURITIES IN WHICH THE PORTFOLIO MAY INVEST
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.
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 Advisers
determines that they are of comparable quality to the ratings above.
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.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS. A mortgage security is an
interest in a pool of mortgage loans. The primary issuers or guarantors of
mortgage securities are GNMA, FNMA, and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage
bankers, commercial banks, and savings and loan associations. FNMA and FHLMC
issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks,
credit unions, and mortgage bankers. 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. (See "What Are the Risks of Investing in
the Fund?")
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, Advisers 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.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional mortgage
securities, are interests in pools of mortgage loans. The interest rates on
the mortgages underlying ARMS are reset periodically. 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. 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 Advisers
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.
COLLATERALIZED MORTGAGE OBLIGATIONS ("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. The 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 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.
Advisers 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. The 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.
FLOATERS. Up to 5% of the Securities Portfolio's assets may be invested in
inverse floaters and super floaters. Please see the SAI for more information
about these investments.
ASSET-BACKED SECURITIES. The 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.
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 Advisers believes
that doing so will help the Portfolio achieve its objective, and the
Portfolio will not use all instruments or strategies at all times.
OTHER INVESTMENT POLICIES OF THE PORTFOLIO
MORTGAGE DOLLAR ROLLS. The Portfolio may enter into mortgage "dollar rolls"
in which the Portfolio sells mortgage-backed securities for delivery in the
current month and simultaneously contracts to repurchase substantially
similar (name, type, coupon, and maturity) securities on a specified future
date. During the roll period, the Portfolio forgoes principal and interest
paid on the mortgage-backed securities. The Portfolio is compensated by the
difference between the current 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.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio 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. The securities subject to resale are held on behalf of the Portfolio by
a custodian bank approved by the Board. 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 Portfolio may experience a loss or
delay in the liquidation of the securities underlying the repurchase
agreement and may also incur liquidation costs. The Portfolio, however,
intends to enter into repurchase agreements only with banks or broker-dealers
that are considered creditworthy by Advisers.
WHEN-ISSUED AND DELAYED 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.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Adjustable Rate Securities Portfolios' Board of Trustees and subject to the
following conditions, the Portfolio may lend its portfolio securities to
qualified securities dealers or other institutional investors, if such loans
do not exceed 10% of the value of the Portfolio's total assets at the time of
the most recent loan. The borrower must deposit with the Portfolio's
custodian bank collateral with an initial market value of at least 102% of
the market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily
to maintain collateral coverage of at least 102%. This collateral shall
consist of cash. The lending of securities is a common practice in the
securities industry. The Portfolio may engage in security loan arrangements
with the primary objective of increasing the Portfolio's income either
through investing cash collateral in short-term interest-bearing obligations
or by receiving a loan premium from the borrower. Under the securities loan
agreement, the Portfolio continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.
BORROWING. The 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.
OTHER POLICIES AND RESTRICTIONS. The Fund and the Portfolio have a number of
additional investment restrictions that limit their activities to some
extent. Some of these restrictions may only be changed with shareholder
approval. For a list of these restrictions and more information about the
Fund's and the Portfolio's investment policies, please see "How Does the Fund
Invest Its Assets?" and "Investment Restrictions" in the SAI.
Each of the Fund's and the corresponding Portfolio's policies and
restrictions discussed in this prospectus and in the 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 FUND'S 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 organization was one of the
first mutual fund complexes in the country to implement this structure, and
the Board does not believe the additional complexities outweigh the potential
benefits to be gained by shareholders.
The Fund's investment of all of its assets in the 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 the Mortgage
Portfolio and one other that invests in the 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 the Adjustable Rate Securities
Portfolios, an open-end management investment company. The Adjustable Rate
Securities Portfolios was organized as a Delaware business trust on February
15, 1991, and is registered with the SEC. The Adjustable Rate Securities
Portfolios currently issues shares in two separate series. In the future,
additional series may be added by the Board of Trustees of the Adjustable
Rate Securities Portfolios.
For information on the Fund's administrator and its expenses, please see "Who
Administers the Fund?"
THE ADVANTAGES OF INVESTING IN THE 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 by allowing an initial investment of as low as $100.
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 by allowing an initial
investment of as low as $100. 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 "How Are Fund Shares Valued?" in the SAI. Principal
payments received on the Portfolio's mortgage securities will be reinvested
by the Portfolio in other securities. These securities may have a higher or
lower yield than the mortgage securities already held by the Portfolio,
depending on market conditions.
An investment in the Fund also provides liquidity since you may redeem shares
of the Fund at any time at the current Net Asset Value. Please see "How Do I
Sell Shares?"
IF YOU ARE AN 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, Advisers, or
Distributors on arbitrage rebate calculations.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The value of your shares will increase as the value of the securities owned
by the Fund increases and will decrease as the value of the Fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the Fund. Since the Fund invests its assets in
shares of the corresponding Portfolio, as the value of the securities owned
by the Portfolio fluctuates, the Portfolio's Net Asset Value per share, and
thus the Fund's Net Asset Value per share, will also fluctuate. In addition
to the factors that affect the value of any particular security that the Fund
or the corresponding Portfolio owns, the value of Fund shares may also change
with movements in the bond market as a whole.
INTEREST RATE RISK. Changes in interest rates will affect the value of the
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.
MASTER/FEEDER FUND STRUCTURE. An investment in the Fund may be subject to
certain risks due to the Fund's structure. These risks include the potential
that if other 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 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 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.
MORTGAGE SECURITIES. The mortgage securities in which the Portfolio invests
differ from conventional bonds in that principal is paid over the life of the
mortgage security rather than at maturity. As a result, the holder of the
mortgage securities (i.e., the Portfolio) receives monthly scheduled payments
of principal and interest and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. When the holder
reinvests the payments and any unscheduled prepayments of principal it
receives, it may receive a rate of interest that is lower than the rate on
the existing mortgage securities. For this reason, mortgage securities may be
less effective than other types of U.S. government securities as a means of
"locking in" long-term interest rates. In general, fixed-rate mortgage
securities have greater exposure to this "prepayment risk" than ARMS.
The market value of mortgage securities, like other U.S. government
securities, will generally vary inversely with changes in market interest
rates, declining when interest rates rise and rising when interest rates
decline. 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. 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. 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. For more information
about the risks of investing in asset-backed securities, please see the SAI.
Investments in fixed-rate securities generally decline in value during
periods of rising interest rates and increase in value when interest rates
fall. To the extent the Securities Portfolio invests in fixed-rate
securities, the value of the Securities Portfolio's and thus the Adjustable
Rate Securities Fund's shares will be more sensitive to interest rate changes
than if the Securities Portfolio were fully invested in adjustable-rate
securities.
WHO ADMINISTERS THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
The Board, with approval of all disinterested and interested Board members,
has adopted written procedures designed to deal with potential conflicts of
interest that may arise from the Trust and the Adjustable Rate Securities
Portfolios having substantially the same boards. These procedures call for an
annual review of each Fund's relationship with the corresponding Portfolio.
If a conflict exists, the boards may take action, which may include the
establishment of a new board. The Board has determined that there are no
conflicts of interest at the present time. For more information, please see
"Summary of Procedures to Monitor Conflicts of Interest" and "Officers and
Trustees" in the SAI.
INVESTMENT MANAGER AND ADMINISTRATOR. Advisers manages the Portfolio's assets
and makes its investment decisions. Advisers also performs similar services
for other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, Advisers and its affiliates manage over $221 billion in
assets. Advisers is also the administrator of the Fund. Please see
"Investment Management and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the
Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Portfolios in which the Funds invest is: T. Anthony Coffey since 1991, Roger
Bayston since 1991 for the Securities Portfolio and since inception for the
Mortgage Portfolio, and Jack Lemein since inception.
T. Anthony Coffey
Portfolio Manager of Advisers
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in Applied Mathematics and Economics from
Harvard University. Mr. Coffey has been with the Franklin Templeton Group
since 1989. He is a member of several securities industry-related
associations.
Roger Bayston
Portfolio Manager of Advisers
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since earning his MBA degree in 1991.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in Finance from the University
of Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
MANAGEMENT FEES. You will bear a portion of the Portfolio's operating
expenses, including its management fees, to the extent that the corresponding
Fund, as a shareholder of the Portfolio, bears these expenses. The portion of
the Portfolio's expenses borne by the corresponding Fund depends on the
Fund's proportionate share of the Portfolio's net assets.
During the fiscal year ended October 31, 1997, the Fund's proportionate share
of the corresponding Portfolio's management fees, before any advance waiver,
totaled 0.40% of the average daily net assets of the Fund. The Fund's
administration fees totaled 0.10%. Total operating expenses, including fees
paid to Advisers before any advance waiver, were 0.93% for the Adjustable
U.S. Government Fund and 1.00% for the Adjustable Rate Securities Fund. Under
an agreement by Advisers to limit its fees, the Adjustable U.S. Government
Fund and the Adjustable Rate Securities Fund each paid a proportionate share
of the corresponding Portfolio's management fees totaling 0.22% and 0.21%,
respectively. Total expenses of the Adjustable U.S. Government Fund and the
Adjustable Rate Securities Fund were 0.75% and 0.81%, respectively. Advisers
may end this arrangement at any time upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Portfolio Buy Securities for Its Portfolio?" in the SAI for more
information.
THE RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the Fund. These expenses may include,
among others, distribution or service fees paid to Securities Dealers or
others who have executed a servicing agreement with the Fund, Distributors or
its affiliates; 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.
Payments by the Fund under the plan may not exceed 0.25% per year of the
Fund's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain purchases made without a sales charge, Securities Dealers may not be
eligible to receive the Rule 12b-1 fees associated with the purchase. For
more information, please see "The Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. Commonly used
measures of performance include total return, current yield and current
distribution rate. Performance figures are usually calculated using the
maximum sales charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows
the income per share earned by the Fund. The current distribution rate shows
the dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based
on past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see
"How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT
OF 1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE.
BECAUSE MANY OF THESE CHANGES ARE COMPLEX, THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUND'S INVESTMENTS
The Fund invests your money in the Portfolio which, in turn, invests in the
bonds and other securities that are described in the section "How Does the
Fund Invest Its Assets?" Special tax rules may apply in determining the
income and gains that the Portfolio earns on its investments. These rules
may, in turn, affect the amount of distributions that the Fund pays to you.
See the SAI for a discussion of these special tax rules.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally
pays no federal income tax on the income and gains that it distributes to you.
TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. Distributions from the Fund, whether you receive them in cash
or in additional shares, are generally subject to income tax. The Fund will
send you a statement in January of the current year that reflects the amount
of ordinary dividends, capital gain distributions, and non-taxable
distributions you received from the Fund in the prior year. This statement
will include distributions declared in December and paid to you in January of
the current year, but which are taxable as if paid on December 31 of the
prior year. The IRS requires you to report these amounts on your income tax
return for the prior year. The Fund's statement for the prior year will tell
you how much of your capital gain distribution represents 28% rate gain
property. The remainder of the capital gain distribution represents 20% rate
gain.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a Section 401(k) plan or IRA, are
generally tax-deferred; this means that you are not required to report Fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Be aware, however, that special rules
apply to payouts from Roth and education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the Fund's
distributions will qualify for the corporate dividends-received deduction.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your
income tax return. If you exchange Fund shares held for 90 days or less and
pay no sales charge, or a reduced sales charge, for the new shares, all or a
portion of the sales charge you paid on the purchase of the shares you
exchanged is not included in their cost for purposes of computing gain or
loss on the exchange. If you hold your shares for six months or less, any
loss you have will be treated as a long-term capital loss to the extent of
any capital gain distributions received by you from the Fund. All or a
portion of any loss on the redemption or exchange of your shares will be
disallowed by the IRS if you purchase other shares in the Fund within 30 days
before or after your redemption or exchange.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions, and gains arising from redemptions or exchanges
of your Fund shares. Fund shares held by the estate of a non-U.S. investor
may be subject to U.S. estate tax. You may wish to contact your tax advisor
to determine the U.S. and non-U.S. tax consequences of your investment in the
Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the Fund and gains arising from redemptions or exchanges of your
Fund shares will generally be subject to state and local income tax. It is
anticipated that no portion of the Fund's distributions will qualify for
exemption from state and local income tax as dividends paid from interest
earned on direct obligations of the U.S. government. The holding of Fund
shares may also be subject to state and local intangibles taxes. You may wish
to contact your tax advisor to determine the state and local tax consequences
of your investment in the Fund.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that
you provide your taxpayer identification number ("TIN"), certify that it is
correct, and certify that you are not subject to backup withholding under IRS
rules. If you fail to provide a correct TIN or the proper tax certifications,
the Fund is required to withhold 31% of all the distributions (including
ordinary dividends and capital gain distributions), and redemption proceeds
paid to you. The Fund is also required to begin backup withholding on your
account if the IRS instructs the Fund to do so. The Fund reserves the right
not to open your account, or, alternatively, to redeem your shares at the
current net asset value, less any taxes withheld, if you fail to provide a
correct TIN, fail to provide the proper tax certifications, or the IRS
instructs the Fund to begin backup withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. YOU SHOULD CONSULT YOUR
OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL, OR FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE FUND. PLEASE SEE "ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES" IN THE SAI FOR MORE COMPLETE DISCUSSION OF THESE
RULES AND RELATED MATTERS. THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL
GAIN DISTRIBUTIONS, FOREIGN TAXES PAID, AND INCOME TAXES WITHHELD IS ALSO
DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK WHICH YOU MAY
OBTAIN BY CONTACTING FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Investors Securities Trust ("the
Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Massachusetts business trust on December 22,
1986, and is registered with the SEC. Shares of each series of the Trust have
equal and exclusive rights to dividends and distributions declared by that
series and the net assets of the series in the event of liquidation or
dissolution. Shares of the Fund are considered Class I shares for redemption,
exchange and other purposes. Additional series and classes of shares may be
offered in the future.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or 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.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
o To open your account: $100*
o To add to your account: $ 25*
*We may waive these minimums for retirement plans. We also reserve the
right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
Method Steps to Follow
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund with your
check made payable to the Fund.
For additional investments:
Send a check made payable to the Fund. Please
include your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to
receive a wire control number and wire
instructions. You need a new wire control
number every time you wire money into your
account. If you do not have a currently
effective wire control number, we will return
the money to the bank, and we will not credit
the purchase to your account.
2. For initial investments you must also return
your signed shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call
before 1:00 p.m. Pacific time and the bank
receives the wired funds and reports the
receipt of wired funds to the Fund by 3:00 p.m.
Pacific time, we will credit the purchase to
your account that day. If we receive your call
after 1:00 p.m. or the bank receives the wire
after 3:00 p.m., we will credit the purchase to
your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include
this statement, we cannot guarantee that you will receive the sales charge
reduction or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------
Under $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.00% 0.85%
$1,000,000 or more* None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to
Securities Dealers" below for a discussion of payments Distributors may make
out of its own resources to Securities Dealers for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing
the Letter of Intent section of the shareholder application. A Letter of
Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased shares of the Fund at a reduced sales charge
under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class II shareholders of
another Franklin Templeton Fund who chose to reinvest their distributions in
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.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales Charge
will apply to your purchase of Fund shares and a new Contingency Period will
begin. We will, however, credit your Fund account with additional shares
based on the Contingent Deferred Sales Charge you paid and the amount of
redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date the CD matures, including any rollover.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment option
the Franklin Valuemark Funds, the Templeton Variable Annuity Fund, or the
Templeton Variable Products Series Fund. You should contact your tax advisor
for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
6. 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 contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent Deferred
Sales Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with additional
shares based on the contingent deferred sales charge you 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.
Various individuals and institutions also may buy shares of the Fund without
a front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is permissible
and suitable for you and the effect, if any, of payments by the Fund on
arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their
investment accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet
the requirements described under "Group Purchases" above to be able to buy
shares without a front-end 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 Contingent
Deferred Sales Charge 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. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for certain purchases made without a sales charge. The
payments are subject to the sole discretion of Distributors, and are paid by
Distributors or one of its affiliates and not by the Fund or its shareholders.
1. Purchases of $1 million or more - up to 0.75% of the amount invested.
2. Purchases made without a front-end sales charge by certain retirement
plans described under "Sales Charge Reductions and Waivers - Retirement
Plans" above - up to 1% of the amount invested.
3. Purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
4. Purchases by Chilean retirement plans - up to 1% of the amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 4 above or a payment of up to
1% for investments described in paragraph 2 will be eligible to receive the
Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and 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.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums.
Method Steps to Follow
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund. If you have never paid a sales charge on your
shares because, for example, they have always been held in a money fund, you
will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without
a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. For accounts with shares subject to a Contingent Deferred Sales
Charge, we will first exchange any shares in your account that are not
subject to the charge. If there are not enough of these to meet your exchange
request, we will exchange shares subject to the charge in the order they were
purchased. If you exchange shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. For more information about the Contingent Deferred Sales
Charge, please see that section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this option
to be available on your account. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(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. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Fund shares
for Advisor Class shares of that fund. Certain shareholders of Class Z shares
of Franklin Mutual Series Fund Inc. may also exchange their Class Z shares
for shares of the Fund at Net Asset Value.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
Method Steps to Follow
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would like your
redemption proceeds wired to a bank account, your instructions
should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name
of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account,
you must first sign up for the wire feature. To sign up, send us
written instructions, with a signature guarantee. To avoid any
delay in processing, the instructions should include the items
listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you
want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement
plan account
o Unless the address on your account was changed by phone within
the last 15 days
- If you do not want the ability to redeem by phone to apply to
your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH Call your investment representative
YOUR
DEALER
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. 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 this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or
draft to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 591/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million
or more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million
or more, any additional investments you make without a sales charge may also
be subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without a front-end sales charge may also be subject to
a Contingent Deferred Sales Charge 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.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated number of shares, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end 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, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million, you can
redeem up to $120,000 annually through a systematic withdrawal plan free of
charge.
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Adjustable U.S. Government Fund declares dividends from its net
investment income monthly to shareholders of record on the first business day
before the 15th of the month and pays them on or about the last day of that
month.
The Adjustable Rate Securities Fund declares dividends from its net
investment income daily and pays them monthly on or about the last day of the
month. The daily allocation of net investment income begins on the day after
we receive your money or settlement of a wire order trade and continues to
accrue through the day we receive your request to sell your shares or the
settlement of a wire order trade.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy Adjustable U.S. Government Fund shares shortly before the record
date, please keep in mind that any distribution will lower the value of the
Fund's shares by the amount of the distribution and you will then receive a
portion of the price you paid back in the form of a taxable distribution.
If you buy Adjustable Rate Securities Fund shares shortly before the Fund
deducts a capital gain distribution from its Net Asset Value, please keep in
mind that you will receive a portion of the price you paid back in the form
of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge). Many shareholders find this a convenient way to diversify their
investments.
3. Receive distributions in cash - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee. If you send the money to a checking account, please see
"Electronic Fund Transfers" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
FUND. You may change your distribution option at any time by notifying us by
mail or phone. Please allow at least seven days before the record date (in
the case of the Adjustable U.S. Government Fund) and the reinvestment date
(in the case of the Adjustable Rate Securities Fund) for us to process the
new option. For Trust Company retirement plans, special forms are required to
receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share, plus any applicable sales charges. When you sell shares, you
receive the Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the Fund. Your redemption proceeds
from the Adjustable U.S. Government Fund will not earn interest between the
time we receive the order from your dealer and the time we receive any
required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time. You can find the prior day's closing Net Asset Value and Offering Price
of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
Type of Account Documents Required
- ------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the Fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your
checking account to the Fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the Fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy
additional shares. Your investments will continue automatically until you
instruct the Fund and your employer to discontinue the plan. To process your
investment, we must receive both the check and payroll deduction information
in required form. Due to different procedures used by employers to handle
payroll deductions, there may be a delay between the time of the payroll
deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. If you choose to have the
money sent to a checking account, please see "Electronic Fund Transfers"
below. Once your plan is established, any distributions paid by the Fund will
be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund
or payments under a systematic withdrawal plan sent directly to a checking
account. If the checking account is with a bank that is a member of the
Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during
that time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the Fund's code number to use TeleFACTS(R). The Adjustable U.S.
Government Fund's code number is 138. The Adjustable Rate Securities Fund's
code number is 151.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the Fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The Fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Portfolio's investment manager and
the Fund's administrator
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate
interests in the same portfolio of investment securities. They differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Because the Fund's sales charge structure and Rule 12b-1 plan are similar to
those of Class I shares, shares of the Fund are considered Class I shares for
redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each
following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the Fund is a legally permissible investment and that can only buy shares of
the Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 2.25%.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R)- Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN INVESTORS SECURITIES TRUST
ADVISOR CLASS
MARCH 1, 1998
INVESTMENT STRATEGY
GLOBAL INCOME
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
INVESTMENT STRATEGY
INCOME
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
This prospectus describes the Advisor Class shares of the Franklin Global
Government Income Fund ("Global Government Income Fund") and the Franklin
Short-Intermediate U.S. Government Securities Fund ("Short-Intermediate U.S.
Government Fund"), each of which may individually or together be referred to
as the "Fund(s)." This prospectus contains information you should know before
investing in the Fund. Please keep it for future reference.
Each Fund currently offers one or more other classes of shares with different
sales charge and expense structures, which affect performance. These classes
are described in a separate prospectus. For more information, contact your
investment representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated March 1, 1998, which may be amended from time to time. It
includes more information about the Fund's procedures and policies. It has
been filed with the SEC and is incorporated by reference into this
prospectus. For a free copy or a larger print version of this prospectus,
call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN INVESTORS SECURITIES TRUST
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights ............................................. 3
How Does the Fund Invest Its Assets? ............................. 4
What Are the Risks of Investing in the Fund? ..................... 15
Who Manages the Fund? ............................................ 20
How Does the Fund Measure Performance? ........................... 23
How Taxation Affects the Fund and Its Shareholders ............... 23
How Is the Trust Organized? ...................................... 26
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 27
May I Exchange Shares for Shares of Another Fund? ................ 31
How Do I Sell Shares? ............................................ 33
What Distributions Might I Receive From the Fund? ................ 34
Transaction Procedures and Special Requirements .................. 36
Services to Help You Manage Your Account ......................... 40
What If I Have Questions About My Account? ....................... 42
GLOSSARY
Useful Terms and Definitions ..................................... 42
APPENDIX
Description of Ratings ........................................... 44
FRANKLIN
INVESTORS
SECURITIES
TRUST -
ADVISOR CLASS
MARCH 1, 1998
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH
CAPITAL LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY SECTION.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
FRANKLIN INVESTORS SECURITIES TRUST
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of the Advisor Class for the
fiscal year ended October 31, 1997. The expenses are annualized. The Fund's
actual expenses may vary.
Global Government Short-Intermediate
Income Fund U.S. Government Fund
- ------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases None None
Exchange Fee (per transaction) $5.00* $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.60% 0.56%
Rule 12b-1 Fees None None
Other Expenses 0.22% 0.14%
Total Fund Operating Expenses 0.82% 0.70%
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------
Global Government Income Fund $8 $26 $46 $101
Short-Intermediate U.S.
Government Fund $7 $22 $39 $ 87
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the period shown below appears in the financial
statements in the Trust's Annual Report to Shareholders for the fiscal year
ended October 31, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
GLOBAL GOVERNMENT INCOME FUND - ADVISOR CLASS
1997***
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net Asset Value, beginning of period.................. $8.71
------
Income from investment operations:
Net investment income................................ .49
Net realized and unrealized (loss)................... (.28)
------
Total from investment operations...................... .21
-------
Less distributions from:
Net investment income................................ (.49)
In excess of net investment income................... (.02)
Total distributions................................... (.51)
--------
Net Asset Value, end of period........................ $8.41
======
Total return*......................................... 2.49%
Ratios/supplemental data
Net assets, end of period (000's)..................... $741
Ratios to average net assets:
Expenses**........................................... .82%
Net investment income**.............................. 7.08%
Portfolio turnover rate............................... 193.30%
Short-Intermediate U.S. Government Fund - Advisor Class
1997***
Per share operating performance
(for a share outstanding throughout the period)
Net Asset Value, beginning of period.................. $10.24
------
Income from investment operations:
Net investment income................................ .47
Net realized and unrealized gain..................... .07
----
Total from investment operations...................... .54
Less distributions from net investment income......... (.48)
--------
Net Asset Value, end of period........................ $10.30
======
Total return*......................................... 5.45%
Ratios/supplemental data
Net assets, end of period (000's)..................... $385
Ratios to average net assets:
Expenses**........................................... .70%
Net investment income**.............................. 5.35%
Portfolio turnover rate............................... 40.56%
*Total return is not annualized.
**Annualized.
***For the period January 2, 1997 (commencement of operations) to October 31,
1997.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Global Government Income Fund's investment objective is to provide high
current income, consistent with preservation of capital, with capital
appreciation as a secondary consideration. The Short-Intermediate U.S.
Government Fund's investment objective is to provide as high a level of
current income as is consistent with prudent investing while seeking
preservation of shareholder's capital. The objective is a fundamental policy
of the Fund and may not be changed without shareholder approval. Of course,
there is no assurance that the Fund will achieve its objective.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
GLOBAL GOVERNMENT INCOME FUND
The Global Government Income 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 Global Government Income Fund considers
securities issued by central banks that are guaranteed by their national
governments to be government securities.
The Global Government Income 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 Global Government Income 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." A detailed
description of these financial transactions is included below. The risk
considerations involved in global investing generally are included under
"What Are the Risks of Investing in the Fund?"
As a global fund, the Global Government Income Fund may invest in securities
issued in any currency and may hold foreign currency. Under normal
circumstances, the Global Government Income Fund invests at least 65% of its
assets in government securities of issuers located in at least three
countries, one of which may be the United States. Securities of issuers
within a given country may be denominated in the currency of another country,
or in multinational currency units such as the European Currency Unit ("ECU").
Under normal economic conditions, the Global Government Income 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 Global Government Income 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 Global Government Income Fund may invest in debt securities with varying
maturities. Under current market conditions, it is expected that the
dollar-weighted average maturity of the Global Government Income Fund's
investments will not exceed 15 years. Generally, the portfolio's average
maturity will be shorter when Advisers expects interest rates worldwide or in
a particular country to rise, and longer when Advisers expects interest rates
to fall.
The Global Government Income 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.
The SAI contains additional information concerning these three latter
categories. 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 Global
Government Income 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 Global Government Income 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 Global Government Income
Fund may, in addition, invest in debt securities denominated in ECU of an
issuer in any country (including supranational issuers). The Global
Government Income Fund may also invest in "semi-governmental securities,"
which are debt securities issued by entities owned by either a national,
state, or equivalent government or are obligations of a government
jurisdiction that are not backed by its full faith and credit and general
taxing powers.
The Global Government Income 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 Global Government Income Fund will evaluate a country's economic
and political conditions such as inflation rate, growth prospects, global
trade patterns, and government policies.
The Global Government Income Fund invests its assets principally within
Australia, Canada, Japan, New Zealand, the U.S., and Western Europe, and in
securities denominated in the currencies of these countries or denominated in
multinational currency units such as the ECU. The Global Government Income
Fund may also acquire securities and currency in less developed countries and
in developing countries, which may involve greater exposure to the risks
ordinarily associated with foreign investing. See "What Are the Risks of
Investing in the Fund? - Foreign Securities." Advisers does not currently
expect the Global Government Income Fund's investments in less developed and
developing countries to exceed 30% of its net assets.
The Global Government Income Fund will not invest in securities of foreign
countries issued without stock certificates or comparable stock documents.
The Global Government Income Fund does not consider securities which it
acquires outside the U.S. and which are publicly traded in the U.S., on a
foreign securities exchange, or in a foreign securities market to be illiquid
assets so long as the Fund acquires and holds the securities with the
intention of reselling the securities in the foreign trading market, the Fund
reasonably believes it can readily dispose of the securities for cash in the
U.S. or foreign market, and current market quotations are readily available.
BANK SECURITIES. The Global Government Income 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 Government Income 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 Global Government Income Fund to
acquire an interest in a loan from a financially strong borrower, which the
Fund could not do directly. The SAI contains further information on loan
participations.
LOWER-RATED DEBT OBLIGATIONS. The Global Government Income Fund may invest in
higher-yielding, higher-risk, lower-rated debt obligations that are rated at
least B by Moody's or S&P or, if unrated, are at least of comparable quality
as determined by Advisers. As of December 31, 1997, the Global Government
Income Fund held approximately 20.6% of its assets in lower-rated investments
and may in the future increase this percentage, but such investments will be
less than 35% of the Fund's net assets. U.S. rating agencies do not rate many
debt obligations of foreign issuers, especially developing market issuers,
and their selection depends on Advisers' internal analysis. Securities rated
BB or lower by S&P or Ba or lower by Moody's (sometimes referred to as "junk
bonds") are regarded as predominately speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and therefore involve special risks. Please see "What
Are the Risks of Investing in the Fund? - High Yield Securities" and the
appendix in this prospectus and the SAI for a discussion of these ratings.
CURRENCY TECHNIQUES AND HEDGING. The Global Government Income Fund intends to
pursue its investment objective through investments in options, futures,
options on futures, and forward contracts. Investment in these securities is
not a fundamental policy of the Global Government Income Fund, and may be
changed at the discretion of the Board without prior notice or shareholder
approval. While there are no specific limits on the Global Government Income
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 Government Income 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 Global Government Income 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 Global Government Income 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 Global
Government Income 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 Global Government Income 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 Global Government Income 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
Global Government Income 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 Global Government Income Fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of Advisers, impede portfolio management or the ability
of the Fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates also may
result in poorer overall performance for the Global Government Income Fund
than if it had not entered into such contracts.
OPTIONS ON U.S. AND FOREIGN SECURITIES. Although the Global Government Income
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 transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities, which are described under "What Are
the Risks of Investing in the Fund?" In addition, a foreign exchange may
impose different exercise and settlement terms, procedures, and margin
requirements than a U.S. exchange.
The Global Government Income Fund may buy put options to hedge against a
decline in the value of its portfolio. By using put options in this way, the
Global Government Income 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 Government Income 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 Government Income 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
Government Income Fund equal to the cost of the options.
The ability of the Global Government Income 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.
The SAI includes a further discussion of the use, risks, and costs of options.
OPTIONS ON FOREIGN CURRENCIES. The Global Government Income Fund may buy and
write put and call options on foreign currencies (traded on U.S. and foreign
exchanges or over-the-counter) for hedging purposes to protect against
declines in the U.S. dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities or other assets to be
acquired. As in the case of other kinds of options, however, the writing of
an option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and the Global Government Income 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 Global
Government Income Fund's position, the Fund may forfeit the entire amount of
the premium plus related transaction costs. The SAI includes a further
discussion of the use, risks, and costs of options on foreign currencies.
Futures Contracts and Options on Futures Contracts. The Global Government
Income Fund may enter into contracts for the purchase or sale for future
delivery of debt securities ("futures contracts") and may buy or write
options to buy or sell futures contracts traded on U.S. and foreign exchanges
("options on futures contracts"). These investment techniques are designed
only to hedge against anticipated future changes in interest rates that
otherwise might either adversely affect the value of the Global Government
Income Fund's portfolio securities or adversely affect the prices of
securities that the Fund intends to buy at a later date. Should interest
rates move in an unexpected manner, the Global Government Income Fund may not
achieve the anticipated benefits of futures contracts or options on futures
contracts or may realize a loss.
The Board has adopted the requirement that the Global Government Income Fund
may only use futures contracts and options on futures contracts for hedging
purposes and not for speculation. In addition, the Global Government Income
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. The SAI contains a further discussion of the use, risks, and costs of
futures contracts and options on futures contracts.
TAX CONSIDERATIONS. The Global Government Income Fund's investment in
options, futures contracts, options on futures contracts, interest rate
swaps, and foreign securities and other complex securities are subject to
special tax rules that may affect the amount, timing, or character of the
income earned by the Fund and distributed to you. The Global Government
Income Fund may also be subject to withholding taxes on earnings from certain
of its foreign securities. See "Additional Information on Distribution and
Taxes" in the SAI for a discussion of these special tax rules.
During periods when Advisers believes that the Global Government Income 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, including (i) U.S. Treasury
obligations, which differ only in their interest rates, maturities, and times
of issuance: U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to 10 years), and U.S. Treasury bonds
(generally maturities of greater than 10 years), all of which are backed by
the full faith and credit of the U.S. government; and (ii) obligations issued
or guaranteed by U.S. government agencies or instrumentalities, some of which
are backed by the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage Association),
some of which are supported by the right of the issuer to borrow from the
U.S. government (e.g., obligations of Federal Home Loan Banks), and some of
which are backed only by the credit of the issuer itself (e.g., obligations
of the Student Loan Marketing Association).
When investing for defensive purposes is appropriate, such as during periods
of adverse market conditions or when relative yields in other securities are
not deemed attractive, the Global Government Income Fund may invest part or
all of its assets in cash (including foreign currency) or cash-equivalent,
short-term obligations, including, but not limited to, the following: CDs,
commercial paper, short-term notes, obligations issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities, and repurchase
agreements secured thereby. In particular, for defensive purposes a larger
portion of the Global Government Income Fund's assets may be invested in U.S.
dollar denominated obligations to reduce the risks inherent in non-dollar
denominated assets.
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
The Short-Intermediate U.S. Government Fund intends to invest up to 100% of
its net assets in U.S. government securities. As a fundamental policy, the
Short-Intermediate U.S. Government Fund must invest at least 65% of its net
assets in U.S. government securities. SEC guidelines require at least 65% of
the Short-Intermediate U.S. Government Fund's total assets be invested in
U.S. government securities, and the Fund will follow that policy
notwithstanding its fundamental policy. It is the investment policy of the
Short-Intermediate U.S. Government Fund (which may be changed upon notice to
shareholders) to maintain the average dollar-weighted maturity of its
portfolio in a range of two to five years. Within this range, the
Short-Intermediate U.S. Government Fund intends to emphasize an average
weighted maturity of 31/2 years or less.
The Short-Intermediate U.S. Government 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, and National Credit
Union Administration.
Since inception, the Short-Intermediate U.S. Government Fund has invested its
assets solely in direct obligations of the U.S. Treasury and in repurchase
agreements collateralized by U.S. Treasury obligations. 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.
The Short-Intermediate U.S. Government 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 Short-Intermediate
U.S. Government 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 Short-Intermediate U.S.
Government 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 Short-Intermediate U.S. Government Fund may also
realize capital gains or losses upon the sale of securities.
ZERO COUPON BONDS. The Short-Intermediate U.S. Government Fund may,
consistent with its other policies, invest in zero coupon bonds issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Zero
coupon bonds are debt obligations 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. A zero coupon security
pays no interest to its holder during its life and its value (above its cost
to the Short-Intermediate U.S. Government Fund) consists of the difference
between its face value at maturity and its cost. These investments experience
greater volatility in market value due to changes in interest rates than debt
obligations that provide for regular payments of interest.
CONCENTRATION. The Short-Intermediate U.S. Government Fund will not invest
more than 25% of the value of its total assets in any one particular industry.
OTHER INVESTMENT POLICIES OF THE FUND
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the
Board and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, 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 Government Income Fund, and 10% in the case of the
Short-Intermediate U.S. Government 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. The lending of securities is a common
practice in the securities industry. The Fund may engage in security loan
arrangements with the primary objective of increasing the Fund's income
either through investing cash collateral in short-term interest-bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends
or interest on any loaned securities. As with any extension of credit, there
are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
WHEN-ISSUED SECURITIES. The Global Government Income Fund may purchase
securities on a "when-issued" or "forward-delivery" basis, and the
Short-Intermediate U.S. Government 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 Government Income
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
U.S. Government 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 Government Income 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, delayed-delivery, or
forward-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 the 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 the Fund
is the buyer in such a transaction, it will maintain, in a segregated account
with its custodian bank, cash or high-grade marketable securities having an
aggregate value equal to the amount of such purchase commitments until
payment is made. To the extent the Short-Intermediate U.S. Government 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. The Fund may engage in repurchase transactions. 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. The securities subject
to resale are held on behalf of the Fund by a custodian bank approved by the
Board. 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. Each Fund, however, intends to enter into repurchase agreements only
with banks or broker-dealers that are considered creditworthy by Advisers.
REVERSE REPURCHASE AGREEMENTS. The Global Government Income Fund may also
enter into reverse repurchase agreements, which are the opposite of
repurchase agreements but involve similar mechanics and risks. The Global
Government Income 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
Government Income 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 Government Income Fund to experience a loss or delay in the
liquidation costs. The Global Government Income Fund intends to enter into
reverse repurchase agreements with domestic or foreign banks or securities
dealers. Advisers will evaluate the creditworthiness of these entities prior
to engaging in such transactions, under the general supervision of the Board.
Except as otherwise indicated, the general investment practices described
above may be changed without shareholder approval, and no assurances can be
given that they will in any event accomplish the results intended.
BORROWING. The Global Government Income 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
Government Income Fund will not make new investments while any outstanding
borrowings exceed 5% of its total assets. The Short-Intermediate U.S.
Government 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. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the Fund has valued them.
PORTFOLIO TURNOVER. The Global Government Income Fund's portfolio turnover
rate was 139.71% for the fiscal year ended October 31, 1996 and 193.30% for
the fiscal year ended October 31, 1997. The higher portfolio turnover rate
for the fiscal year ended October 31, 1997 was due to changing market
conditions and a higher level of redemptions than in previous years. High
portfolio turnover may increase the Global Government Income Fund's
transaction costs.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional
investment restrictions that limit its activities to some extent. Some of
these restrictions may only be changed with shareholder approval. For a list
of these restrictions and more information about the Fund's investment
policies, please see "How Does the Fund Invest Its Assets?" and "Investment
Restrictions" in the SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and
in the SAI is considered at the time the Fund makes an investment. The Fund
is generally not required to sell a security because of a change in
circumstances.
The foregoing permissible investments and practices are subject to the
fundamental policy of the Short-Intermediate U.S. Government Fund, which can
only be changed with shareholder approval, that the Fund will only purchase
securities and engage in trading practices that are permitted, without
limitation, to national banks, federal savings and loan associations, and
federal credit unions. Please see the SAI for more details on the
Short-Intermediate U.S. Government Fund's policies regarding eligible federal
credit union investments.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The value of your shares of the Fund will increase as the value of the
securities owned by the Fund increases and will decrease as the value of the
Fund's investments decrease. In this way, you participate in any change in
the value of the securities owned by the Fund. In addition to the factors
that affect the value of any particular security that the Fund owns, the
value of Fund shares may also change with movements in the stock and bond
markets as a whole.
HIGH YIELD SECURITIES. Because the Global Government Income 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 Government Income Fund invests.
Accordingly, an investment in the Global Government Income 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 Government Income 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 Government Income Fund's Net Asset Value may be
adversely affected before an issuer defaults. In addition, the Global
Government Income 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 Global Government
Income 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,
Advisers may find it necessary to replace the securities with lower-yielding
securities, which could result in less net investment income for the Global
Government Income 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
the Global Government Income Fund to manage the timing of its income. Under
the Code and U.S. Treasury regulations, the Global Government Income Fund may
have to accrue income on defaulted securities and distribute the income to
shareholders for tax purposes, even though the Fund is not currently
receiving interest or principal payments on the defaulted securities. To
generate cash to satisfy these distribution requirements, the Global
Government Income 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 Government Income
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 Government Income Fund's portfolio.
The Global Government Income 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 Government Income 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 Government
Income Fund may also incur special costs in disposing of restricted
securities, although the Fund will generally not incur any costs when the
issuer is responsible for registering the securities.
The Global Government Income 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 Government Income Fund has no arrangement
with its underwriter or any other person concerning the acquisition of these
securities.
The high yield securities market is relatively new and much of its growth
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 Government Income Fund's Net Asset Value.
The Global Government Income Fund relies on Advisers' judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In this
evaluation, Advisers 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 table below shows the percentage of the Global Government Income Fund's
assets invested in securities rated in each of 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
Global Government Income Fund's portfolio composition based on month-end
assets for each of the 12 months in the fiscal year ended October 31, 1997.
Average Weighted
S&P RATING PERCENTAGE OF ASSETS
AAA................................. 76.7%
AA+................................. 1.6%
AA.................................. 0.3%
AA-................................. 0.8%
A+*................................. 4.7%
A................................... 0.6%
BB+................................. 0.3%
BB**................................ 10.1%
BB-................................. 4.0%
B+.................................. 0.9%
*4.4% are unrated and have been included in the A+ rating category.
**0.5% are unrated and have been included in the BB rating category.
NON-DIVERSIFICATION RISK. Because the Global Government Income Fund is
non-diversified, there is no restriction under the Investment Company Act of
1940 on the percentage of its assets that it may invest at any time in the
securities of any issuer. However, the Global Government Income Fund intends
to comply with the diversification and other requirements of the Code
applicable to regulated investment companies, so that the Fund will not be
subject to U.S. federal income tax on the income and capital gain that it
distributes to shareholders. Nevertheless, the Global Government Income
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 CURRENCY. The Global Government Income 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 Government Income
Fund's assets denominated in the foreign currency. These changes will also
affect the Fund's yield, income, and distributions to shareholders. In
addition, although the Global Government Income 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 Government Income 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 Government Income 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 Government
Income Fund will only invest in foreign currency denominated debt securities
of countries whose currency is fully exchangeable into U.S. dollars without
legal restriction at the time of investment.
FOREIGN SECURITIES. You should carefully consider the risks involved in
investment in foreign securities. Each of the risks described below may be
heightened to the extent that the Global Government Income Fund invests in
securities of developing or emerging markets. These risks include political,
social, or economic instability in the country of the issuer; the difficulty
of predicting international trade patterns; the possibility of the imposition
of exchange controls; expropriation; limits on removal of currency or other
assets; nationalization of assets; foreign withholding; and income taxation
and foreign trading practices (including higher trading commissions,
custodial charges, and delayed settlements). Foreign securities may be
subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. government, its
instrumentalities or agencies. The markets on which foreign securities trade
may have less volume and liquidity, and may be more volatile than securities
markets in the U.S.
In addition, there may be less publicly available information about a foreign
company than is contained in reports and reflected in ratings published for a
U.S. domiciled company. Foreign companies generally are not subject to
uniform accounting, auditing, and financial reporting standards comparable to
those applicable to U.S. domestic companies. There is generally less
government regulation of securities exchanges, brokers, and listed companies
abroad than in the U.S. Transaction costs on foreign securities exchanges may
be higher than in the U.S., and foreign securities settlements may, in some
instances, be subject to delays and related administrative uncertainties.
Confiscatory taxation or diplomatic developments could also affect investment
in those countries.
The operating expense ratio of the Global Government Income Fund may be
higher than that of an investment company investing exclusively in U.S.
securities because of the additional expenses of the Fund, such as custodial
costs, valuation costs, and communication costs, although they are expected
to be similar to expenses of other investment companies investing in a mix of
U.S. securities and securities of one or more foreign countries.
INTEREST RATE, CURRENCY AND MARKET RISK. The Global Government Income Fund is
subject to interest rate, currency, and market risk. The Short-Intermediate
U.S. Government Securities Fund is subject to interest rate risk. To the
extent the Fund invests in debt securities, changes in interest rates in any
country where the Fund is invested will affect the value of the Fund's
portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. To the extent the Global Government
Income Fund invests in common stocks, a general market decline in any country
where the Fund is invested may cause the value of what the Fund owns, and
thus the Fund's share price, to decline. Changes in currency valuations may
also affect the price of Global Government Income Fund shares. The value of
stock markets, currency valuations and interest rates throughout the world
have increased and decreased in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
The Board also monitors the Fund to ensure no material conflicts exist among
the Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Advisers and its affiliates manage over $221 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a
summary of the Fund's Code of Ethics.
Under an agreement with Advisers, Investment Counsel is the sub-advisor of
the Global Government Income Fund. Investment Counsel provides Advisers with
investment management advice and assistance. The agreement provides for the
sub-advisor to furnish, subject to Advisers' discretion, a portion of the
investment advisory services for which Advisers is responsible pursuant to
the management agreement. These responsibilities may include managing a
portion of the Fund's investments and supplying research services. Investment
Counsel's activities are subject to the Board's review and control, as well
as Advisers' instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Global Government Income Fund's portfolio is: Thomas J. Dickson since 1993,
Neil S. Devlin since 1994, and Thomas Latta since 1995.
Thomas J. Dickson
Portfolio Manager of Investment Counsel
Mr. Dickson is currently a portfolio manager for several Franklin Templeton
mutual funds. He holds a Bachelor of Science in managerial economics from the
University of California at Davis. Prior to joining the Templeton
organization in 1994, Mr. Dickson worked as a fixed-income analyst and trader
for Franklin Advisers, Inc. Mr. Dickson's current research responsibilities
include country coverage of Australia, Canada, Japan and New Zealand.
Neil S. Devlin
Chief Investment Officer and Executive Vice President of Templeton Global
Bond Managers, a division of Investment Counsel
Mr. Devlin holds a Bachelor of Arts in economics and philosophy from Brandeis
University, and is a Chartered Financial Analyst. Before joining the
Templeton organization in 1987, he was a portfolio manager and bond analyst
with Constitution Capital Management of Boston. Prior to that, Mr. Devlin was
a bond trader and research analyst for the Bank of New England. Mr. Devlin
currently directs investment strategies in both the developed and emerging
fixed income markets. He also manages numerous Franklin Templeton mutual
funds as well as corporate pension accounts.
Thomas Latta
Vice President of Templeton Global Bond Managers, a division of Investment
Counsel
Mr. Latta attended the University of Missouri and New York University. Mr.
Latta is a Chartered Financial Analyst, and a member of the Association for
Investment Management and Research and the Institute of Chartered Financial
Analysts. Before joining the Templeton organization in 1991, Mr. Latta worked
as a portfolio manager with Forester & Hairston, a Houston-based global fixed
income investment management firm. Prior to that, Mr. Latta spent seven years
with Merrill Lynch, Pierce, Fenner & Smith Incorporated where, among other
assignments, he was part of an investment advisory team to the Saudi Arabian
Monetary Authority. While at Merrill Lynch, Mr. Latta also acted as an
advisor to investment managers concerning the modeling and application of
interest rate immunization strategies in fixed income portfolios. Mr. Latta's
current research responsibilities include the core European markets.
The team responsible for the day-to-day management of the Short-Intermediate
U.S. Government Fund's portfolio is: Jack Lemein, David Capurro, and Tom
Runkel since its inception.
Jack Lemein
Senior Vice President of Advisers
Mr. Lemein holds a Bachelor of Science degree in Finance from the University
of Illinois. He has been in the securities industry since 1967 and with the
Franklin Templeton Group since 1984. He is a member of several securities
industry-related associations.
David Capurro
Vice President of Advisers
Mr. Capurro holds a Master of Business Administration degree and a Bachelor
of Science degree in Business Administration from California State University
at Hayward. Mr. Capurro has been with the Franklin Templeton Group since 1985.
Tom Runkel
Vice President of Advisers
Mr. Runkel is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Santa Clara. He earned his
Bachelor of Arts degree in Political Science from the University of
California at Davis. Mr. Runkel has been with the Franklin Templeton Group
since 1985. He is a member of several securities industry- related committees
and associations.
MANAGEMENT FEES. During the fiscal year ended October 31, 1997, management
fees totaling 0.60% and 0.56% of the average monthly net assets of the Global
Government Income Fund and the Short-Intermediate U.S. Government Fund,
respectively, were paid to Advisers. Total expenses of the Global Government
Income Fund and the Short-Intermediate U.S. Government Fund, including fees
paid to Advisers, were 0.82% and 0.70%, respectively. During the same period,
Advisers paid Investment Counsel a sub-advisory fee totaling 0.32% of the
average monthly net assets of the Global Government Income Fund. This fee is
not a separate expense of the Global Government Income Fund but is paid by
Advisers from the management fees it receives from the Global Government
Income Fund.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the Fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance.
Commonly used measures of performance include total return, current yield and
current distribution rate.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows
the income per share earned by Advisor Class. The current distribution rate
shows the dividends or distributions paid to shareholders of Advisor Class.
This rate is usually computed by annualizing the dividends paid per share
during a certain period and dividing that amount by the current Net Asset
Value of the class. Unlike current yield, the current distribution rate may
include income distributions from sources other than dividends and interest
received by the Fund.
The investment results of the Advisor Class will vary. Performance figures
are always based on past performance and do not guarantee future results. For
a more detailed description of how the Fund calculates its performance
figures, please see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT
OF 1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE.
BECAUSE MANY OF THESE CHANGES ARE COMPLEX, THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUND'S INVESTMENTS
The Fund invests your money in the bonds, stocks, and other securities that
are described in the section "How Does the Fund Invest Its Assets?" Special
tax rules may apply in determining the income and gains that the Fund earns
on its investments. These rules may, in turn, affect the amount of
distributions that the Fund pays to you. See the SAI for a discussion of
these special tax rules.
HOW DOES THE FUND EARN INCOME AND GAINS?
The Fund earns interest and dividends (the Fund's "income") on its
investments. When the Fund sells a security for a price that is higher than
it paid, it has a gain. When the Fund sells a security for a price that is
lower than it paid, it has a loss. If the Fund has held the security for more
than one year, the gain or loss will be a long-term capital gain or loss. If
the Fund has held the security for one year or less, the gain or loss will be
a short-term capital gain or loss. The Fund's gains and losses are netted
together, and, if the Fund has a net gain (the Fund's "gains"), that gain
will generally be distributed to you.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally
pays no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains
from the Global Government Income Fund's investments in foreign bonds. These
taxes will reduce the amount of the Global Government Income Fund's
distributions to you, but, depending upon the amount of the Fund's assets
that are invested in foreign securities and foreign taxes paid, may be passed
through to you as a foreign tax credit on your income tax return. The Global
Government Income Fund may also invest in the securities of foreign companies
that are "passive foreign investment companies" ("PFICs"). These investments
in PFICs may cause the Global Government Income Fund to pay income taxes and
interest charges. If possible, the Global Government Income Fund will adopt
strategies to avoid PFIC taxes and interest charges.
TAXATION OF SHAREHOLDERS.
Distributions. Distributions from the Fund, whether you receive them in cash
or in additional shares, are generally subject to income tax. The Fund will
send you a statement in January of the current year that reflects the amount
of ordinary dividends, capital gain distributions, and non-taxable
distributions you received from the Fund in the prior year. This statement
will include distributions declared in December and paid to you in January of
the current year, but which are taxable as if paid on December 31 of the
prior year. The IRS requires you to report these amounts on your income tax
return for the prior year. The Fund's statement for the prior year will tell
you how much of your capital gain distribution represents 28% rate gain
property. The remainder of the capital gain distribution represents 20% rate
gain.
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the Fund's income and gains
on its investments in bonds, stocks and other securities. The Fund's income
and short term capital gains are paid to you as ordinary dividends. The
Fund's long-term capital gains are paid to you as capital gain distributions.
If the Fund pays you an amount in excess of its income and gains, this excess
will generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the Fund's distributions to you.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a Section 401(k) plan or IRA, are
generally tax-deferred; this means that you are not required to report Fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Be aware, however, that special rules
apply to payouts from Roth and education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the Fund's
distributions will qualify for the corporate dividends-received deduction.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your
income tax return. If you exchange Fund shares held for 90 days or less and
pay no sales charge, or a reduced sales charge, for the new shares, all or a
portion of the sales charge you paid on the purchase of the shares you
exchanged is not included in their cost for purposes of computing gain or
loss on the exchange. If you hold your shares for six months or less, any
loss you have will be treated as a long-term capital loss to the extent of
any capital gain distributions received by you from the Fund. All or a
portion of any loss on the redemption or exchange of your shares will be
disallowed by the IRS if you purchase other shares in the Fund within 30 days
before or after your redemption or exchange.
WHAT IS A REDEMPTION?
A redemption is a sale by you to the Fund of some or all of your shares in
the Fund. The price per share you receive when you redeem Fund shares may be
more or less than the price at which you purchased those shares. An exchange
of shares in the Fund for shares of another Franklin Templeton Fund is
treated as a redemption of Fund shares and then a purchase of shares of the
other fund. When you redeem or exchange your shares, you will generally have
a gain or loss, depending upon whether the basis in your shares is more or
less than your cost or other basis in the shares. Call Fund Information for a
free shareholder Tax Information Handbook if you need more information in
calculating the gain or loss on the redemption or exchange of your shares.
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends paid
from interest earned on direct obligations of the U.S. government, subject to
certain restrictions. The Fund will provide you with information at the end
of each calendar year on the amount of such dividends that may qualify for
exemption from reporting on your individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions, and gains arising from redemptions or exchanges
of your Fund shares. Fund shares held by the estate of a non-U.S. investor
may be subject to U.S. estate tax. You may wish to contact your tax advisor
to determine the U.S. and non-U.S. tax consequences of your investment in the
Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the Fund, and gains arising from redemptions or exchanges of
your Fund shares will generally be subject to state and local income tax. The
holding of Fund shares may also be subject to state and local intangibles
taxes. You may wish to contact your tax advisor to determine the state and
local tax consequences of your investment in the Fund.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that
you provide your taxpayer identification number ("TIN"), certify that it is
correct, and certify that you are not subject to backup withholding under IRS
rules. If you fail to provide a correct TIN or the proper tax certifications,
the Fund is required to withhold 31% of all the distributions (including
ordinary dividends and capital gain distributions) and redemption proceeds
paid to you. The Fund is also required to begin backup withholding on your
account if the IRS instructs the Fund to do so. The Fund reserves the right
not to open your account, or, alternatively, to redeem your shares at the
current Net Asset Value, less any taxes withheld, if you fail to provide a
correct TIN, fail to provide the proper tax certifications, or the IRS
instructs the Fund to begin backup withholding on your account.
WHAT IS A BACKUP WITHHOLDING?
Backup withholding occurs when the Fund is required to withhold and pay over
to the IRS 31% of your distributions and redemption proceeds. You can avoid
backup withholding by providing the Fund with your TIN, and by completing the
tax certifications on your shareholder application that you were asked to
sign when you opened your account. However, if the IRS instructs the Fund to
begin backup withholding, it is required to do so even if you provided the
Fund with your TIN and these tax certifications, and backup withholding will
remain in place until the Fund is instructed by the IRS that it is no longer
required.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. YOU SHOULD CONSULT YOUR
OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL, OR FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE FUND. SEE "ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES" IN THE SAI FOR A MORE COMPLETE DISCUSSION OF THESE
RULES AND RELATED MATTERS. THE TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL
GAIN DISTRIBUTIONS, FOREIGN TAXES PAID, AND INCOME TAXES WITHHELD ARE ALSO
DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK, WHICH YOU
MAY REQUEST BY CONTACTING FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The Global Government Income Fund is a non-diversified series of Franklin
Investors Securities Trust (the "Trust"), an open-end management investment
company, commonly called a mutual fund. The Short-Intermediate U.S.
Government Fund is a diversified series of the Trust. The Trust was organized
as a Massachusetts business trust on December 22, 1986, and is registered
with the SEC. As of January 1, 1997, the Global Government Income Fund and
the Short-Intermediate U.S. Government Fund each began offering a new class
of shares designated Franklin Global Government Income Fund - Advisor Class
and Franklin Short-Intermediate U.S. Government Securities Fund - Advisor
Class, respectively. All shares outstanding before the offering of Advisor
Class shares have been designated Franklin Global Government Income Fund -
Class I, Franklin Global Government Income Fund - Class II, and Franklin
Short-Intermediate U.S. Government Securities Fund - Class I. Additional
series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
Fund and have the same voting and other rights and preferences as any other
class of the Fund for matters that affect the Fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters 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.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or 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.
As of February 2, 1998, FTTC TTEE for ValuSelect owned of record and
beneficially more than 25% of the outstanding shares of the Advisor Class of
the Global Government Income Fund, and Templeton Fund Trust Co. owned of
record and beneficially more than 25% of the outstanding shares of the
Advisor Class of the Short-Intermediate U.S. Government Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. Please note that
as of January 1, 1998, shares of the Fund are not available to retirement
plans through Franklin Templeton's ValuSelect(R) program. Retirement plans in
Franklin Templeton's ValuSelect program before January 1, 1998, however, may
continue to invest in the Fund.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
o To open your account: $5,000,000*
o To add to your account: $25*
*We may waive or lower these minimums for certain investors. Please see
"Minimum Investments" below. We also reserve the right to refuse any order to
buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
METHOD Steps to Follow
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund with your check
made payable to the Fund.
For additional investments:
Send a check made payable to the Fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a wire
control number and wire instructions. You need a new
wire control number every time you wire money into
your account. If you do not have a currently
effective wire control number, we will return the
money to the bank, and we will not credit the
purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the Fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day. If we
receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
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THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
MINIMUM INVESTMENTS
To determine if you meet the minimum initial investment requirement of $5
million, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. At least $1 million of this amount, however, must be invested in
Advisor Class or Class Z shares of any of the Franklin Templeton Funds.
The Fund may waive or lower its minimum investment requirement for certain
purchases. A lower minimum initial investment requirement applies to
purchases by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs, subject to a $250,000 minimum
initial investment requirement or a $100,000 minimum initial investment
requirement for an individual client
2. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors, subject to a $1,000
minimum initial investment requirement
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
5. Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code, subject to a
$1 million initial investment in Advisor Class shares
No minimum initial investment requirement applies to purchases by:
1. Accounts managed by the Franklin Templeton Group
2. The Franklin Templeton Profit Sharing 401(k) Plan
3. Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
Section 401 of the Code, including salary reduction plans qualified under
Section 401(k) of the Code, and that (i) are sponsored by an employer with
at least 10,000 employees, or (ii) have plan assets of $100 million or more
4. 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
5. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if the
group as a whole meets the $5 million minimum investment requirement. A
qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need
an application other than the one included in this prospectus. For a
retirement plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors
or one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and some do
not offer Advisor Class shares.
METHOD Steps to Follow
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
- If you do not want the ability to exchange by
phone to apply to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(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. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described
in this paragraph, you will be considered a Market Timer. Each exchange by
a Market Timer, if accepted, will be charged $5.00. Some of our funds do
not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton
Growth Fund, you may exchange the Advisor Class shares you own for Class I
shares of those funds or of Templeton Institutional Funds, Inc. at Net Asset
Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. You may also exchange your Advisor Class
shares for Class Z shares of Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
Method Steps to Follow
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts under
court jurisdiction may have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a separate
agreement. Call Institutional Services to receive a
copy.
o If there are no share certificates issued for the
shares you want to sell or you have already returned
them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. 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 this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or
draft to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 591/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Global Government Income Fund declares dividends from its net investment
income monthly to shareholders of record on the first business day before the
15th of the month and pays them on or about the last day of that month.
The Short-Intermediate U.S. Government Fund declares dividends from its net
investment income daily and pays them monthly on or about the last day of the
month. The daily allocation of net investment income begins on the day after
we receive your money or settlement of a wire order trade and continues to
accrue through the day we receive your request to sell your shares or the
settlement of a wire order trade.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy Global Government Income Fund shares shortly before the record
date, please keep in mind that any distribution will lower the value of the
Fund's shares by the amount of the distribution and you will then receive a
portion of the price you paid back in the form of a taxable distribution.
If you buy Short-Intermediate U.S. Government Fund shares shortly before the
Fund deducts a capital gain distribution from its Net Asset Value, please
keep in mind that you will receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
same class of the Fund by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date (in the case of the Global Government Income Fund) or the
reinvestment date (in the case of the Short-Intermediate U.S. Government
Fund) for us to process the new option. For Trust Company retirement plans,
special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The
Net Asset Value we use when you buy or sell shares is the one next calculated
after we receive your transaction request in proper form. If you buy or sell
shares through your Securities Dealer, however, we will use the Net Asset
Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds from the
Global Government Income Fund will not earn interest between the time we
receive the order from your dealer and the time we receive any required
documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time. You can find the prior day's closing Net Asset Value in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the Fund, determined by the value of the shares of each class. To calculate
Net Asset Value per share of each class, the assets of each class are valued
and totaled, liabilities are subtracted, and the balance, called net assets,
is divided by the number of shares of the class outstanding. The Fund's
assets are valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A notarized signature is not sufficient.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b)
retirement accounts by phone, certain restrictions may be imposed on other
retirement plans.
To obtain any required forms or more information about distribution or
transfer procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
Type of Account Documents Required
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CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the Fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do
this if the value of your account fell below this amount because you
voluntarily sold your shares and your account has been inactive (except for
the reinvestment of distributions) for at least six months. Before we close
your account, we will notify you and give you 30 days to increase the value
of your account to $100. These minimums do not apply if you fall within
categories 4, 5, 6 or 7 under "How Do I Buy Shares? - Opening Your Account."
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your
checking account to the Fund each month to buy additional shares. If you are
interested in this program, please refer to the shareholder application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment
plan such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. Once your plan is
established, any distributions paid by the Fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us in
writing at least seven business days before the end of the month preceding a
scheduled payment. Please see "How Do I Buy, Sell and Exchange Shares? -
Systematic Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account; and
o obtain price information about any Franklin Templeton Fund.
You will need the Fund's code number to use TeleFACTS(R). The Global Government
Income Fund's code number is 635, and the Short-Intermediate U.S. Government
Fund's code number is 636.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the Fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The Fund, Distributors and Advisers are also located at this
address. Investment Counsel is located at Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394-3091. You may also contact us by phone
at one of the numbers listed below.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Global Government Income Fund
offers three classes of shares, designated "Class I," "Class II," and
"Advisor Class." The Short-Intermediate U.S. Government Fund offers two
classes of shares, designated "Class I" and "Advisor Class." The classes have
proportionate interests in the Fund's portfolio. They differ, however,
primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the Global
Government Income Fund's sub-advisor
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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
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.
However, the relative degree of safety 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
Franklin Convertible Securities Fund
Franklin Equity Income Fund
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1998
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets? ................. 2
What Are the Risks
of Investing in the Fund? ........................... 11
Investment Restrictions .............................. 12
Officers and Trustees ................................ 15
Investment Management
and Other Services .................................. 19
How Does the Fund Buy
Securities for Its Portfolio? ....................... 20
How Do I Buy, Sell and Exchange Shares?.............. 21
How Are Fund Shares Valued? .......................... 25
Additional Information on
Distributions and Taxes ............................. 26
The Fund's Underwriter ............................... 31
How Does the Fund
Measure Performance? ................................ 34
Miscellaneous Information ............................ 37
Financial Statements ................................. 39
Useful Terms and Definitions ......................... 39
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
The Franklin Global Government Income Fund (the "Global Fund") is a
non-diversified series of Franklin Investors Securities Trust (the "Trust"),
an open-end management investment company. The Franklin Short-Intermediate
U.S. Government Securities Fund (the "Short-Intermediate Fund"), the Franklin
Convertible Securities Fund (the "Convertible Fund"), and the Franklin Equity
Income Fund (the "Equity Fund") are diversified series of the Trust. Each
series may individually or together be referred to as the "Fund(s)."
The Global Fund's investment objective is to provide high current income,
consistent with preservation of capital; capital appreciation is a secondary
consideration. The Fund seeks to achieve its objective by investing primarily
in debt securities issued by domestic and foreign governments.
The Short-Intermediate Fund's investment objective is to provide as high a
level of current income as is consistent with prudent investing while seeking
preservation of shareholders' capital. The Short-Intermediate Fund seeks to
achieve its objective by investing in a portfolio of U.S. government
securities with primary emphasis on securities with remaining maturities of
31/2 years or less.
The Convertible Fund's investment objective is to maximize total return,
consistent with reasonable risk, by seeking to optimize capital appreciation
and high current income under varying market conditions. The Convertible Fund
seeks to achieve its objective by investing primarily in convertible
securities as described in detail in the Prospectus.
The Equity Fund's investment objective is to maximize total return through
emphasis on high current income and long-term capital appreciation,
consistent with reasonable risk. The Equity Fund seeks to achieve its
objective by investing primarily in common and preferred stocks with
above-average dividend yields.
The Prospectus, dated March 1, 1998, as may be amended from time to time,
contains the basic information you should know before investing in the Fund.
For a free copy, call 1-800/DIAL BEN.
This SAI describes the Fund's Class I and Class II shares (except in the case
of the Short-Intermediate Fund, which does not offer Class II shares). The
Global Fund and the Short-Intermediate Fund each currently offer another
class of shares with a different sales charge and expense structure, which
affects performance. This class is described in a separate SAI and
prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
Mutual funds, annuities, and other investment products:
o are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other agency of the U.S. government;
o are not deposits or obligations of, or guaranteed or endorsed by, any bank;
o are subject to investment risks, including the possible loss of principal.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How Does the Fund Invest Its
Assets?"
GLOBAL FUND
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, Advisers
believes there may be a market for such securities either in multinational
companies wishing to purchase such assets at a discount for further
investment, or from the issuing governments which may decide to redeem their
obligations at a discount.
Interest Rate Swaps. The 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.
The entity holding the fixed-rate obligation will transfer the obligation to
the intermediary, and such entity will then be obligated to pay to the
intermediary a floating rate of interest, generally including a fractional
percentage as a commission for the intermediary. The intermediary also makes
arrangements with a second entity that has a floating-rate obligation that
substantially mirrors the obligation desired by the first party. In return
for assuming a fixed obligation, the second entity will pay the intermediary
all sums that the intermediary pays on behalf of the first entity, plus an
arrangement fee and other agreed upon fees.
Interest rate swaps 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.
Other Fixed-Income Securities. As stated in the Prospectus, 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).
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. U.S. futures contracts
have been designed by exchanges which have been designated "contract markets"
by the Commodity Futures Trading Commission ("CFTC"), and must be executed
through a futures commission merchant or brokerage firm that is a member of
the relevant contract market. Existing contract markets for futures contracts
on debt securities include the Chicago Board of Trade, the New York Cotton
Exchange, the MidAmerica Commodity Exchange and the International Money
Market of the Chicago Mercantile Exchange. Futures contracts trade on these
exchanges, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
The 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, Government National Mortgage Association ("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.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual
obligation is terminated before the settlement date of the contract without
having to make or take delivery of the securities or currency. The
termination of a contractual obligation is accomplished by buying (or
selling, as the case may be) on a commodities exchange an identical
offsetting futures contract calling for delivery in the same month. Such a
transaction, which is effected through a member of an exchange, cancels the
obligation to make or take delivery of the underlying security or currency.
Since all transactions in the futures market are made, offset, or fulfilled
through a clearinghouse associated with the exchange on which the contracts
are traded, the Global Fund will incur brokerage fees when it purchases or
sells futures contracts.
To the extent the Global Fund enters into a futures contract, it will deposit
in a segregated account with its custodian bank cash or U.S. Treasury
obligations equal to a specified percentage of the value of the futures
contract (the "initial margin"), as required by the relevant contract market
and futures commission merchant. The futures contract will be
marked-to-market daily. Should the value of the futures contract decline
relative to the Global Fund's position, the Fund will be required to pay to
the futures commission merchant an amount equal to such change in value. The
Global Fund may also cover its futures position by holding a call option on
the same futures contract permitting the Fund to purchase the instrument or
currency at a price no higher than the price established in the futures
contract which it sold.
The purpose of the purchase or sale of a futures contract by the Global Fund
is to attempt to protect the Fund from fluctuations in interest or currency
exchange rates without actually buying or selling long-term, fixed-income
securities or currency. For example, if the Global 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 Global Fund. If interest rates did increase, the value of the
debt securities owned by the Global 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 Global 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 Global Fund to
maintain a defensive position without having to sell its portfolio
securities. Similarly, if the Global 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 Global Fund's futures position.
Alternatively, when it expects that interest rates may decline, the Global
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 Global 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 Global Fund could then buy long-term bonds on the cash (securities)
market. Similarly, if the Global Fund intends to acquire a security or other
asset denominated in a currency that is expected to appreciate against the
U.S. dollar, the Fund may purchase futures contracts on that currency. If the
value of the foreign currency does appreciate, the increase in the value of
the futures position will offset the increased U.S. dollar cost of acquiring
the asset denominated in that currency.
The ordinary spreads between prices in the cash (securities) or foreign
currency and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
markets are subject to initial deposit and variation margin requirements.
Rather than meeting additional variation margin requirements, investors may
close futures contracts through offsetting transactions which could distort
the normal relationship between the cash (securities) or foreign currency and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus causing distortions.
Due to the possibility of such distortion, a correct forecast of general
interest rate trends by Advisers may still not result in a successful hedging
transaction.
Options on Futures Contracts. The 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. 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 Global Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Global 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 Global 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 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. For example, where the Global 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
Global 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 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. A call option
on foreign currencies written by the Global 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 Global 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 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.
Loan Participations. The Global Fund may invest in loan participations, which
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"), which operate in a variety of industries and geographical
regions. The Global Fund will purchase participation interests in Loans that
may pay interest at rates which are periodically reset on the basis of a base
lending rate plus a premium. These base lending rates are generally the Prime
Rate offered by a major U.S. bank, LIBOR, the CD rate, or other base lending
rates used by commercial lenders. The Loans typically have the most senior
position in a Borrower's capital structure, although some Loans may hold an
equal ranking with other senior securities of the Borrower. Although the
Loans generally are secured by specific collateral, the 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 Advisers may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative
factor in Advisers' analysis.
Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in Loans generally are not listed on any
national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary purchases and sales of
loan participations generally are conducted in private transactions between
buyers and sellers. Many of the Loans in which the Global Fund expects to
purchase interests are of a relatively large principal amount and are held by
a relatively large number of owners which, in Advisers' opinion, should
enhance the relative liquidity of such interests.
When acquiring a loan participation, the 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.
SHORT-INTERMEDIATE FUND
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 SHORTINTERMEDIATE 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.
OTHER POLICIES
There are no restrictions or limitations on investments in obligations of the
U.S. or of corporations chartered by Congress as federal government
instrumentalities. The underlying assets of the Fund may be retained in cash,
including cash equivalents, which are Treasury bills, commercial paper, and
short-term bank obligations such as certificates of deposit, bankers'
acceptances, and repurchase agreements. It is intended, however, that only so
much of the underlying assets of the Fund be retained in cash as is deemed
desirable or expedient under then-existing market conditions.
U.S. Government Securities. As indicated in the Prospectus, the Fund 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 Fund 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.
Options On Securities. In an effort to increase current income and to reduce
the fluctuations in Net Asset Value, the Global 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 over-the-counter
markets. The Convertible Fund and the Equity Fund may write covered call
options and purchase call and put options on securities. The Convertible Fund
and the Equity Fund may also purchase call and put options on stock indices
in order to hedge against the risk of market- or industry-wide stock price
fluctuations.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the buyer of the option the right to buy and
obligates the writer of the option to sell the underlying security at the
exercise price at any time during the option period, regardless of the market
price of the underlying security. The buyer of an option pays a cash premium
that typically reflects, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand factors, and interest rates.
Call options give the holder the right to buy the underlying security from
the writer at a stated exercise price upon exercising the option at any time
prior to its expiration. A call option written by the Fund is covered if the
Fund owns or has an absolute right (such as by conversion) to the underlying
security covered by the call. A call option is also covered if the Fund holds
a call on the same security and in the same principal amount as the call
written and the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in
cash, government securities, or other high-grade debt obligations in a
segregated account with its custodian bank.
When 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. A put option written by a Fund is covered if the Fund maintains
cash or high-grade debt obligations with a value equal to the exercise price
in a segregated account with its custodian bank, or holds a put on the same
security and in the same principal amount as the put written and the exercise
price of the put held is equal to or greater than the exercise price of the
put written.
The writer of an option who wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the Options Clearing
Corporation or otherwise economically nullified. 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. Because increases in the market price of a call option
written by a Fund will generally be inversely related to the market price of
the underlying security, appreciation in the value of the underlying security
owned by a Fund is likely to offset in whole or in part any loss resulting
from the closing out of a call 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.
The writer of an option may have no control over when the underlying
securities must be sold in the case of a call option, or purchased in the
case of a put option, since the writer of certain options may be assigned an
exercise notice at any time prior to the expiration of the option. Whether or
not an option expires unexercised, the writer retains the amount of the
premium.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing sale transactions in
particular options held by a Fund, with the result that the Fund would have
to exercise the options in order to realize any profit. 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.
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 (although the premium can be used to
offset any losses or add to the Fund's income). 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.
In the case of put options, a Fund's gain will be reduced by the amount of
the premium and transaction costs it paid and may be offset by a decline in
the value of its portfolio securities. If the value of the underlying stock
index never exceeds the exercise price (or never declines below the exercise
price in the case of put options), the Fund may suffer a loss equal to the
amount of the premium it paid, plus transaction costs. A Fund may also close
out its option positions before they expire by entering into a closing
purchase transaction as discussed above. Risks may also arise because the
correlation between movements in the index and the price of the securities
underlying the options is imperfect, and this risk increases as the
composition of a Fund's portfolio diverges from the composition of the
relevant index.
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 Global Fund may use buy-and-write
transactions using in-the-money call options when it expects that the price
of the underlying security will remain flat or decline moderately during the
option period. The Global Fund may use buy-and-write transactions using
at-the-money call options when it expects that the price of the underlying
security will remain fixed or advance moderately during the option period.
The Global Fund may use buy-and-write transactions using out-of-the-money
call options when it expects that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security
up to the exercise price will be greater than the appreciation in the price
of the underlying security alone. If the call options are exercised in such
transactions, the Global Fund's maximum gain will be the premium received by
it for writing the option, adjusted upward or downward by the difference
between the Fund's purchase price for the security and the exercise price. If
the options are not exercised and the price of the underlying security
declines, the amount of such decline will be mitigated by the premium
received.
Foreign Securities. As described in the Prospectus, the Global Fund, the
Convertible Fund, and the Equity Fund may invest in foreign securites. A Fund
will not acquire the securities of foreign issuers outside of the U.S. under
circumstances where, at the time of acquisition, the Fund has reason to
believe that it could not resell the securities in a public trading market.
Investors should recognize that foreign securities are often traded with less
frequency and volume, and therefore may have greater price volatility, than
is the case with many U.S. securities. Notwithstanding the fact that the
Global Fund, the Convertible Fund, and the Equity Fund intend to acquire the
securities of foreign issuers only where there are public trading markets,
investments by a Fund in the securities of foreign issuers may tend to
increase the risks with respect to the liquidity of the Fund's portfolio and
the Fund's ability to meet a large number of shareholders' redemption
requests should there be economic or political turmoil in a country in which
a Fund has its assets invested or should relations between the U.S. and a
foreign country deteriorate markedly.
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.
Illiquid Securities and Restricted Securities. The Fund may invest up to 10%
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, over-the-counter options and the assets used to cover such options,
and other securities which are not readily marketable. Investments in savings
deposits are generally considered illiquid and will, together with other
illiquid investments, not exceed 10% of the Fund's total net assets.
Notwithstanding this limitation, the Board has authorized the Fund to invest
in securities that cannot be offered to the public for sale without first
being registered under the Securities Act of 1933, as amended (the "1933
Act") ("restricted securities"), where such investment is consistent with the
Fund's investment objective and has authorized such securities to be
considered liquid to the extent Advisers determines that there is a liquid
institutional or other market for such securities. For example, restricted
securities that may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the 1933 Act and for which a liquid
institutional market has developed will be considered liquid even though such
securities have not been registered pursuant to the 1933 Act.
The Board will review any determination by Advisers to treat a restricted
security as a liquid security on an ongoing basis, including Advisers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, Advisers and the Board will take into account
the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (iii) dealer undertakings to
make a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer). To
the extent the Fund invests in restricted securities that are deemed liquid,
the general level of illiquidity in the Fund may be increased if qualified
institutional buyers become uninterested in purchasing these securities or
the market for these securities contracts. The Short-Intermediate Fund has
not purchased and does not intend currently to purchase illiquid or
restricted securities.
WHAT ARE THE RISKS
OF INVESTING IN THE FUND?
Foreign Securities. As stated in the Prospectus, investments in foreign
securities present special risks and considerations not typically associated
with investments in securities issued by U.S. issuers. Such risks include
reductions of income as a result of foreign taxes; fluctuation in value of
foreign portfolio investments due to changes in currency rates and control
regulations (e.g., currency blockage); transaction charges for currency
exchange; lack of information about foreign governments; greater difficulty
in commencing lawsuits; increased risk of delays in settlement of portfolio
transactions or loss of certificates because of the lesser speed and
reliability of mail service; and differences (which may be favorable or
unfavorable) between the U.S. economy and foreign economies.
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.
In addition to the matters discussed in the Prospectus, you should be aware
that when trading options on foreign exchanges or in the over-the-counter
market, many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, the 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 Advisers' investment judgment about the general direction of interest or
currency exchange rates is incorrect, the Fund's overall performance would be
poorer than if it had not entered into any such contract. For example, if the
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.
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 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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the Fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the Fund or
(ii) 67% or more of the shares of the Fund present at a shareholder meeting
if more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy, whichever is less.
The 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. 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.
8. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
9. Invest in interests in oil, gas or other mineral exploration or
development programs.
10. Invest in companies for the purpose of exercising control or management.
11. Purchase securities of other investment companies.
12. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures contracts, forward contracts or repurchase transactions.
13. Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issuer as, and equal in
amount to, the securities sold short ("short sales against the box"), and
unless not more than 10% of the Fund's net assets (taken at market value) is
held as collateral for such sales at any one time.
Restrictions No. 7, 11, and 12 are not fundamental policies of the Global
Fund and may be changed by the trustees without shareholder approval.
The Short-Intermediate Fund, the Convertible Fund, and the Equity 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 Prospectus.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of the Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of 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 "How Does the Fund Invest Its Assets?" in the Prospectus).
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 and the Convertible Fund may each also be subject to
investment limitations imposed by foreign jurisdictions in which it sells its
shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the
Fund intends 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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five Years
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 28 of the investment companies in
the Franklin Templeton Group of Funds.
Harris J. Ashton (65) Trustee
191 Clapboard Ridge
Greenwich, CT 06830
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 52 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 (65) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 54 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
Edith E. Holiday (46) Trustee
3239 38th Street, N.W.
Washington, DC 20016
Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present); formerly, chairman (1995-1997) and trustee
(1993-1997) of 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); and trustee or
director of 24 of the investment companies in the Franklin Templeton Group of
Funds.
*Edward B. Jamieson (49) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of five of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (65) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 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 53 of the investment companies in the
Franklin Templeton Group of Funds; and formerly, Director, General Host
Corporation (nursery and craft centers).
*Rupert H. Johnson, Jr. (57) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
57 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of Funds; formerly
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (53) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
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 56 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief
Investment Officer and Director, Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (59) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently
paid $925 per month plus $925 per meeting attended. As shown above, the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table
provides the total fees paid to nonaffiliated Board members by the Trust and
by other funds in the Franklin Templeton Group of Funds.
Total Fees Number of Boards in
Total Fees Received from the the Franklin Templeton
Received Franklin Templeton Group of Funds on
Name from the Trust***Group of Funds**** Which Each Serves*****
Frank H. Abbott, III $21,275 $165,937 28
Harris J. Ashton 21,275 344,642 52
S. Joseph Fortunato 21,275 361,562 54
David W. Garbellano* 16,650 91,317 N/A
Edith Holiday** 0 72,875 24
Frank W.T. LaHaye 20,350 141,433 27
Gordon S. Macklin 21,275 337,292 51
*Deceased, September 27, 1997.
**Elected to the Board, January 15, 1998.
***For the fiscal year ended October 31, 1997.
****For the calendar year ended December 31, 1997.
*****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 57 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director 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 Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of February 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 390
shares of the Global Fund - Class I, 198 shares of the Short-Intermediate
Fund - Class I, 87 shares of the Convertible Fund - Class I, and 2,135 shares
of the Equity Fund - Class I, or less than 1% of the total outstanding shares
of each Fund's Class I shares. Many of the Board members also own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively,
of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
Fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the Fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the Fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
Under an agreement with Advisers, Investment Counsel is the Global Fund's
sub-advisor. Investment Counsel provides Advisers with investment management
advice and assistance. Under the sub-advisory agreement, Investment Counsel
provides, subject to Advisers' discretion, a portion of the investment
advisory services for which Advisers is responsible pursuant to the
management agreement. These responsibilities may include managing a portion
of the Global Fund's investments and supplying research services including
information, analytical reports, computer screening studies, statistical
data, and factual resumes pertaining to securities throughout the world. This
supplemental research, when utilized, is subject to analysis by Advisers
before being incorporated into the investment advisory process. The
sub-advisory agreement provides that Investment Counsel may also select
brokers and dealers for execution of the Global Fund's portfolio transactions
consistent with the Fund's brokerage policies.
Management Fees. Under its management agreement, each Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% for the first $100
million of net assets of the Fund; 1/24 of 1% on net assets of the Fund in
excess of $100 million up to and including $250 million; and 9/240 of 1% of
net assets of the Fund in excess of $250 million. The fee is computed at the
close of business on the last business day of each month. Each class pays its
proportionate share of the management fee. Under the sub-advisory agreement,
Advisers pays Investment Counsel a sub-advisory fee, in U.S. dollars, equal
to an annual rate of 0.35% of the average monthly net assets, up to and
including $100 million, 0.25% of average monthly net assets over $100 million
up to and including $250 million; and 0.20% of average monthly net assets
over $250 million. This fee is not a separate expense of the Global Fund but
is paid by Advisers from the management fees it receives from the Fund.
The table below shows the management fees paid by the Fund for the fiscal
years ended October 31, 1995, 1996 and 1997:
Management Fees Paid
Fund 1997 1996 1995
Global
Fund $ 785,629 $ 866,730 $ 984,273
Short-
Intermediate
Fund 1,076,296 1,142,250 1,187,800
Convertible
Fund 1,075,628 699,454 453,492
Equity
Fund 1,783,336 1,251,297 738,214*
*Management fee, before an advance fee waiver, totaled $754,194. Under an
agreement by Advisers to limit its fees, the Equity Fund paid the fee shown.
For the same periods, Advisers paid Investment Counsel sub-advisory fees of
$530,209, $473,601 and $428,496, respectively.
Management Agreements. The management and sub-advisory agreements are in
effect until February 28, 1999. They may continue in effect for successive
annual periods if their continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of
the Fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to either agreement or
interested persons of any such party (other than as members of the Board),
cast in person at a meeting called for that purpose. The management agreement
may be terminated without penalty at any time by the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities on 30
days' written notice to Advisers, or by Advisers on 30 days' written notice
to the Fund, and will automatically terminate in the event of its assignment,
as defined in the 1940 Act. The sub-advisory agreement may be terminated
without penalty at any time by the Board or by vote of the holders of a
majority of the Fund's outstanding voting securities, or by either Advisers
or Investment Counsel on not less than 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
Administrative Services. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the Fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. The fee is paid by Advisers. It is not a separate expense of the
Fund.
Shareholder Servicing Agent. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. 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, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the fiscal year
ended October 31, 1997, their auditing services consisted of rendering an
opinion on the financial statements of the Trust included in the Trust's
Annual Report to Shareholders for the fiscal year ended October 31, 1997.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Convertible Fund, 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 on behalf of the Convertible Fund or the
Equity Fund, Advisers seeks to obtain prompt execution of orders at the most
favorable net price. For portfolio transactions on a securities exchange, the
amount of commission paid by the Fund is negotiated between Advisers and the
broker executing the transaction. The determination and evaluation of the
reasonableness of the brokerage commissions paid are based to a large degree
on the professional opinions of the persons responsible for placement and
review of the transactions. These opinions are based on the experience of
these individuals in the securities industry and information available to
them about the level of commissions being paid by other institutional
investors of comparable size. Advisers will ordinarily place orders to buy
and sell over-the-counter securities on a principal rather than agency basis
with a principal market maker unless, in the opinion of Advisers, a better
price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those
another broker may charge, if Advisers determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to Advisers include, among others, supplying information
about particular companies, markets, countries, or local, regional, national
or transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and
appropriate assistance to Advisers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund.
They must, however, be of value to Advisers in carrying out its overall
responsibilities to its clients.
Since most purchases by the Global Fund and the Short-Intermediate Fund are
principal transactions at net prices, each of these Funds incurs little or no
brokerage costs. The Global Fund and the Short-Intermediate Fund each 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 Global Fund and the Short-Intermediate Fund 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 Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Fund, any portfolio securities tendered by the Fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.
During the fiscal years ended October 31, 1995, 1996 and 1997, the Global
Fund and the Short-Intermediate Fund paid no brokerage commissions. During
the same periods, the Convertible Fund paid brokerage commissions totaling
$29,731, $84,758, and $147,042, respectively, and the Equity Fund paid
brokerage commissions totaling $167,560, $293,423, and $401,820, respectively.
As of October 31, 1997, the Global Fund, the Short-Intermediate Fund, and the
Equity Fund did not own securities of their regular broker-dealers. As of the
same date, the Convertible Fund owned securities issued by Salomon, Inc.,
valued in the aggregate at $1,620,000. Except as noted, the Convertible Fund
did not own any securities issued by its regular broker-dealers as of the end
of the fiscal year.How Do I Buy, Sell and Exchange Shares?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund
may be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction
fee in the percentages indicated in the table under "How Do I Buy Shares? -
Purchase Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedules of sales charges:
Convertible Fund and Equity Fund
Size of Purchase - U.S. dollars Sales Charge
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
Global Fund and Short-Intermediate Fund
Size of Purchase - U.S. dollars Sales Charge
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
Other Payments to Securities Dealers. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I 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 I 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 I shares by certain retirement plans
without a front-end sales charge, as discussed in the Prospectus: 1% on sales
of $500,000 to $2 million, plus 0.80% on sales over $2 million to $3 million,
plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales over
$50 million to $100 million, plus 0.15% on sales over $100 million.
Distributors may make these payments in the form of contingent advance
payments, which may be recovered from the Securities Dealer or set off
against other payments due to the dealer if shares are sold within 12 months
of the calendar month of purchase. Other conditions may apply. All terms and
conditions may be imposed by an agreement between Distributors, or one of its
affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
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, however, those who have shown an interest in the
Franklin Templeton Funds are more likely to be considered. To the extent
permitted by their firm's policies and procedures, a registered
representative's expenses in attending these meetings may be covered by
Distributors.
Letter of Intent. You may qualify for a reduced sales charge when you buy
Class I shares, as described in the Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales
charge, you may file with the Fund a signed shareholder application with the
Letter of Intent section completed. After the Letter is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period, except
in the case of certain retirement plans, will be subtracted from the amount
of the purchases for purposes of determining whether the terms of the Letter
have been completed. If the Letter is not completed within the 13 month
period, there will be an upward adjustment of the sales charge, depending on
the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the
sales charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered
in your name until you fulfill the Letter. This policy of reserving shares
does not apply to certain retirement plans. If total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in your name or delivered to you or as you
direct. If total purchases, less redemptions, exceed the amount specified
under the Letter and is an amount that would qualify for a further quantity
discount, a retroactive price adjustment will be made by Distributors and the
Securities Dealer through whom purchases were made pursuant to the Letter (to
reflect such further quantity discount) on purchases made within 90 days
before and on those made after filing the Letter. The resulting difference in
Offering Price will be applied to the purchase of additional shares at the
Offering Price applicable to a single purchase or the dollar amount of the
total purchases. If the total purchases, less redemptions, are less than the
amount specified under the Letter, you will remit to Distributors an amount
equal to the difference in the dollar amount of sales charge actually paid
and the amount of sales charge that would have applied to the aggregate
purchases if the total of the purchases had been made at a single time. Upon
remittance, the reserved shares held for your account will be deposited to an
account in your name or delivered to you or as you direct. If within 20 days
after written request the difference in sales charge is not paid, the
redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve
5% of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Reinvestment Date. Shares (other than Short-Intermediate Fund shares)
acquired through the reinvestment of dividends will be purchased at the Net
Asset Value determined on the business day following the dividend record date
(sometimes known as the "ex-dividend date"). The processing date for the
reinvestment of dividends may vary and does not affect the amount or value of
the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
Except in the case of the Short-Intermediate Fund, if you request the
exchange of the total value of your account, declared but unpaid income
dividends and capital gain distributions will be exchanged into the new fund
and will be invested at Net Asset Value. If you request the exchange of the
total value of your Short-Intermediate Fund account, accrued but unpaid
income dividends and capital gain distributions will be reinvested in the
Fund at the Net Asset Value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the Fund's
investment objective exist immediately. This money will then be withdrawn
from the short-term, money market instruments and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the fifth business day following the sale. The funds you
are seeking to exchange into may delay issuing shares pursuant to an exchange
until that fifth business day. The sale of Fund shares to complete an
exchange will be effected at Net Asset Value at the close of business on the
day the request for exchange is received in proper form. Please see "May I
Exchange Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
Fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the Fund receives notification
of the shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the Fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
Special Services. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the Fund may reimburse
Investor Services an amount not to exceed the per account fee that the Fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the Fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at
their market price as determined above. The current market value of any
option held by the Fund is its last sale price on the relevant exchange
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
With respect to the Short-Intermediate Fund, the Convertible Fund, and the
Equity Fund, the value of a foreign security is determined as of the close of
trading on the foreign exchange on which it is traded or as of the 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 Net Asset
Value of each class. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the Board.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the Net Asset Value of each class of the Global Fund is not
calculated. Thus, the calculation of the Net Asset Value of each class of the
Global Fund 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 Net Asset Value of each class is determined as of such times.
Occasionally, events affecting the values of these securities may occur
between the times at which they are determined and the close of the NYSE that
will not be reflected in the computation of the Net Asset Value. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith
by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the Fund may utilize a pricing service, bank or Securities Dealer
to perform any of the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
Distributions of net investment income. The Fund receives income generally in
the form of dividends, interest, original issue, market, and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitutes its 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 derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the Fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the Fund. Any net short-term or long-term capital gains
realized by the Fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required
to report the capital gain distributions paid to you from gains realized on
the sale of portfolio securities using the following categories:
"28% rate gains": Gains resulting from securities the Fund sold after July
28, 1997 that it held for more than one year but not more than 18 months, and
securities the Fund sold before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate
of 28%.
"20% rate gains": Gains resulting from securities the Fund sold after July
28, 1997 that it held for more than 18 months, and under a transitional rule,
securities the Fund sold between May 7 and July 28, 1997 (inclusive) that it
held for more than one year. These gains will be taxable at a maximum rate of
20% for individual investors in the 28% or higher federal income tax
brackets, and at a maximum rate of 10% for individual investors in the 15%
federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8%
for individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than 5 years which are sold after December
31, 2000. For individuals who are subject to tax at higher rates, qualified
5-year gains are net gains on securities which are purchased after December
31, 2000 and are held for more than 5 years. Taxpayers subject to tax at the
higher rates may also make an election for shares held on January 1, 2001 to
recognize gain on their shares in order to qualify such shares as qualified
5-year property.
The Fund will advise you at the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to
include 1997 Act tax law changes and may be obtained by calling Fund
Information. You should consult your personal tax advisor to address
questions concerning your personal tax reporting.
Certain distributions paid in January. Distributions that are declared in
October, November, or December and paid to you in January of the following
year will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The Fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
Effect of foreign investments on distributions. Each Fund, except for the
Short-Intermediate Fund, may invest in foreign currency denominated
securities. Most foreign exchange gains realized on the sale of debt
instruments are treated as ordinary income by the Fund. Similarly, foreign
exchange losses realized by the Fund on the sale of debt instruments 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 1997 Act also simplifies the procedures by which you can claim tax
credits on your individual income tax returns for the foreign taxes paid by
the Fund. If you claim a credit for foreign taxes paid of $300 or less on a
single return or $600 or less on a joint return during any year (all of which
must be reported on IRS Form 1099-DIV from the Fund to you) you may bypass
the burdensome and detailed reporting requirements on the supporting foreign
tax credit schedule (Form 1116) and report foreign taxes paid directly on
page 2 of Form 1040. You should note that this simplified procedure will not
be available until calendar year 1998.
Information on the tax character of distributions. The Fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, an amount of income may be designated and
distributed to you as ordinary income or capital gain that is not equal to
the actual amount of such income earned during the period of your investment
in the Fund.
TAXES
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
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. 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 you. 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 available earnings and
profits.
In order to qualify as a regulated investment company for tax purposes, the
Fund must meet certain specific requirements, including the following:
o The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. government securities, and securities of other
regulated investment companies) can exceed 5% of the Fund's total assets;
o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
Excise tax distribution requirements. The Code requires the Fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The Fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and 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. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. 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 for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. 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. See
"Additional Information on Distributions and Taxes - Distributions" for a
description of the holding periods and categories of capital gain that apply
under the 1997 Act.
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 purchase 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 purchase.
Deferral of basis. All or a portion of the sales charge that you paid for
your shares in the Fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the Fund or in another fund in the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold 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 GNMA 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. At the end of each calendar year, the Fund
will provide you with the percentage of any dividends paid that may qualify
for tax-free treatment on your personal income tax return. You should consult
with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this
income are different for corporations, corporate shareholders should consult
with their corporate tax advisors about whether any of their distributions
may be exempt from corporate income or franchise taxes.
Dividends-received deduction for corporations. It is anticipated that no
portion of the Global Fund or the Short-Intermediate Fund's distributions
will qualify for the corporate dividends-received deduction.
Corporate shareholders of the Convertible Fund and the Equity Fund should
note that only a small percentage of the dividends paid by the Fund for the
most recent calendar 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 the Fund as eligible for such treatment.
Dividends so designated by the Fund must be attributable to dividends earned
by the Fund from U.S. corporations that were not debt-financed.
Under the 1997 Act, the amount that the Fund may designate as eligible for
the dividends-received deduction will be reduced or eliminated if the shares
on which the dividends were earned by the Fund were debt-financed or held by
the Fund for less than a 46-day period during a 90-day period beginning 45
days before the ex-dividend date of the corporate stock. Similarly, if your
Fund shares are debt-financed or held by you for less than this same 46-day
period, then the dividends-received deduction may also be reduced or
eliminated. Even if designated as dividends eligible for the
dividends-received deduction, all dividends (including the deducted portion)
must be included in your alternative minimum taxable income calculation.
Investment in complex securities. Each Fund, except for the
Short-Intermediate Fund, may invest in derivative securities. The Fund's
investment in options, futures contracts, and forward contracts, including
transactions involving actual or deemed short sales or foreign exchange gains
or losses, are subject to many complex and special tax rules.
Over-the-counter options on debt securities and equity options, including
options on stock and on narrow-based stock indexes, will be subject to tax
under section 1234 of the Code, generally producing a long-term or short-term
capital gain or loss upon exercise, lapse, or closing out of the option or
sale of the underlying stock or security. Certain other options, futures, and
forward contracts entered into by the Fund are generally governed by section
1256 of the Code. These "section 1256" positions generally include listed
options on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year (and on
other dates as prescribed by the Code), and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by section 988 of the Code)
will generally be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. Under legislation pending in technical
corrections to the 1997 Act, the 60% long-term capital gain portion will
qualify as 20% rate gain and will be subject to tax to individual investors
at a maximum rate of 20% for investors in the 28% or higher federal income
tax brackets, or at a maximum rate of 10% for investors in the 15% federal
income tax bracket. While foreign currency is marked-to-market at year end,
gain or loss realized as a result will always be ordinary. Even though
marked-to-market, gains and losses realized on foreign currency and foreign
security investments will generally be treated as ordinary income. The effect
of section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on section 1256 positions
may require the Fund to accrue taxable income without the corresponding
receipt of cash. In order to generate cash to satisfy the distribution
requirements of the Code, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash
flows from other sources such as the sale of Fund shares. In these ways, any
or all of these rules may affect the amount, character, and timing of income
distributed to you by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods, and conversion of short-term
capital losses into long-term capital losses. The Fund may make certain tax
elections for mixed straddles (i.e., straddles comprised of at least one
section 1256 position and at least one non-section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain
debt instruments. The Fund will generally be treated as making a constructive
sale when it: 1) enters into a short sale on the same property, 2) enters
into an offsetting notional principal contract, or 3) enters into a futures
or forward contract to deliver the same or substantially similar property.
Other transactions (including certain financial instruments called collars)
will be treated as constructive sales as provided in Treasury regulations to
be published. There are also certain exceptions that apply for transactions
that are closed before the end of the 30th day after the close of the taxable
year.
Distributions paid to you by the Fund of ordinary income and short-term
capital gains arising from the Fund's investments, including investments in
options, forwards, and futures contracts, will be taxable to you as ordinary
income. The Fund will monitor its transactions in options and contracts and
may make certain other tax elections to mitigate the effect of the above
rules.
Investments in foreign currencies and foreign securities. Each Fund, except
the Short-Intermediate Fund, may invest in foreign currency denominated
securities. Under the Code, gains or losses attributable to fluctuations in
foreign currency exchange rates that occur between the time the Fund accrues
income (including dividends), or accrues expenses that are denominated in a
foreign currency, and the time the Fund actually collects the income or pays
the expenses are generally treated as ordinary income or loss. Similarly, on
the disposition of debt securities denominated in a foreign currency and on
the disposition of certain options, futures, and forward contracts, gain or
loss attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of the Fund's net investment company taxable income,
that, in turn, will affect the amount of income to be distributed to you by
the Fund.
If the Fund's section 988 losses exceed the Fund's other net investment
company taxable income during a taxable year, the Fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your Fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your Fund shares will be treated as
capital gain to you.
Investment in passive foreign investment company securities. Each Fund,
except the Short-Intermediate Fund, may invest in shares of foreign
corporation that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is
classified as a PFIC if at least one-half of its assets constitute
investment-type assets or 75% or more of its gross income is investment-type
income.
If the Fund receives an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the
Fund to you. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the Fund
held the PFIC shares. The Fund itself will be subject to tax on the portion,
if any, of an excess distribution that is so allocated to prior Fund taxable
years, and an interest factor will be added to the tax, as if the tax had
been payable in the prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
Fund. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital
gain. This may have the effect of increasing Fund distributions to you that
are treated as ordinary dividends rather than long-term capital gain
dividends.
Each Fund, except the Short-Intermediate Fund, may be eligible to elect
alternative tax treatment with respect to PFIC shares. Under an election that
currently is available in some circumstances, the Fund generally would be
required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether distributions are received from the
PFIC during such period. If this election were made, the special rules,
discussed above, relating to the taxation of excess distributions would not
apply. In addition, the 1997 Act provides for another election that would
involve marking-to-market the Fund's PFIC shares at the end of each taxable
year (and on certain other dates as prescribed in the Code), with the result
that unrealized gains would be treated as though they were realized. The Fund
would also be allowed an ordinary deduction for the excess, if any, of the
adjusted basis of its investment in the PFIC stock over its fair market value
at the end of the taxable year. This deduction would be limited to the amount
of any net mark-to-market gains previously included with respect to that
particular PFIC security. If the Fund were to make this second PFIC election,
tax at the Fund level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount
of tax payable by the Fund (if any), the amounts distributable to you by the
Fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is
a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the Fund acquires shares in that corporation. While
the Fund will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so
and it reserves the right to make such investments.
Conversion transactions. Gains realized by the Fund from transactions that
are deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to
the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of the Fund's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
section 263(g) of the Code dealing with capitalized carrying costs.
Stripped preferred stock. Each Fund, except for the Short-Intermediate Fund,
may invest in preferred and preference stock. Occasionally, a Fund may
purchase "stripped preferred stock" that is subject to special tax treatment.
Stripped preferred stock is defined as certain preferred stock issues where
ownership of the stock has been separated from the right to receive dividends
that have not yet become payable. The stock must have a fixed redemption
price, must not participate substantially in the growth of the issuer, and
must be limited and preferred as to dividends. The difference between the
redemption price and purchase price is taken into Fund income over the term
of the instrument as if it were original issue discount. The amount that must
be included in each period generally depends on the original yield to
maturity, adjusted for any prepayments of principal.
Investments in original issue discount ("OID") and market discount bonds. The
Fund's investments in zero-coupon bonds, bonds issued or acquired at a
discount, delayed-interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the Fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero-coupon and
delayed-interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The Fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the Fund level. PIK bonds are
subject to similar tax rules concerning the amount, character, and timing of
income required to be accrued by the Fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the Fund may elect to accrue market
discount on a current basis, in which case the Fund will be required to
distribute any accrued discount. If the Fund does not elect to accrue market
discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
Defaulted obligations. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions retained by Distributors after
allowances to dealers, and the amounts received by Distributors in connection
with redemptions or repurchases of shares for the fiscal years ended October
31, 1995, 1996 and 1997.
Amount Received in
Total Amount Connection With
Commissions Retained by Redemptions
Received Distributors or Repurchases
1997
Global Fund $ 16,188 $ 12,577 $ 3,054
Short-Intermediate Fund 330,666 42,408 --
Convertible Fund 1,373,166 130,410 8,497
Equity Fund 1,524,045 144,609 13,137
1996
Global Fund $ 27,589 $ 293 $ 813
Short-Intermediate Fund 229,997 29,004 --
Convertible Fund 1,132,135 117,440 1,285
Equity Fund 1,819,338 186,833 1,595
1995
Global Fund $ 388,327 $ 4,942 $ 24
Short-Intermediate Fund 248,800 31,768 --
Convertible Fund 458,575 51,364 --
Equity Fund 1,255,780 142,848 --
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for
each class, as discussed below. Except as noted, Distributors received no
other compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and, if offered, Class II have separate distribution plans or "Rule
12b-1 plans" that were adopted pursuant to Rule 12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, the Global Fund may pay up to a
maximum of 0.15% per year, the Short-Intermediate Fund up to a maximum of
0.10% per year, the Convertible Fund up to a maximum of 0.25% per year, and
the Equity Fund up to a maximum of 0.25% per year, of Class I's average daily
net assets, payable quarterly, for expenses incurred in the promotion and
distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual
fees payable under the plan will be as follows: The annual fees payable by
the Global Fund will be equal to the sum of (i) the amount obtained by
multiplying 0.15% by the average daily net assets represented by Class I
shares of the Fund that were acquired by investors on or after May 1, 1994,
the effective date of the plan ("New Assets"), and (ii) the amount obtained
by multiplying 0.05% by the average daily net assets represented by Class I
shares of the Fund that were acquired before May 1, 1994 ("Old Assets"). The
annual fee payable by the Short-Intermediate Fund will be equal to the sum of
(i) 0.10% of New Assets and (ii) 0.05% of Old Assets. The annual fee payable
by the Convertible Fund and the Equity Fund will be equal to the sum of (i)
0.25% of New Assets, and (ii) 0.15% 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 0.15% for the Global Fund, 0.10% for the
Short-Intermediate Fund, 0.25% for the Convertible Fund, and 0.25% for the
Equity Fund is reached on a yearly basis, up to an additional 0.05% will be
paid by the Convertible Fund and Equity Fund and 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 I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.07% (0.05% plus 0.02%)
for the Global Fund and the Short-Intermediate Fund, and 0.20% (0.15% plus
0.05%) for the Convertible Fund and Equity Fund, of the average daily net
assets of Class I and, as Class I shares are sold on or after May 1, 1994,
will increase over time. Thus, as the proportion of Class I shares purchased
on or after May 1, 1994, increases in relation to outstanding Class I shares,
the expenses attributable to payments under the plan will also increase (but
will not exceed 0.15% of average daily net assets for the Global Fund, 0.10%
of average daily net assets for the Short-Intermediate Fund, 0.25% of average
daily net assets for the Convertible Fund, and 0.25% of average daily net
assets for the Equity Fund). While this is the currently anticipated
calculation for fees payable under the Class I plan, the plan permits the
Board to allow the Fund to pay a full 0.15% on all assets of the Global Fund,
0.10% on all assets of the Short-Intermediate Fund, or 0.25% on all assets of
the Convertible Fund or the Equity 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 I plan.
The Class I plan does not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plan, the Global Fund pays Distributors
up to 0.50% per year of Class II's average daily net assets, and the
Convertible Fund and the Equity Fund each pay Distributors up to 0.75% per
year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
Fund.
Under the Class II plan, the Global Fund also pays an additional 0.15% per
year and the Convertible Fund and the Equity Fund each pay an additional
0.25% per year of Class II's average daily net assets, payable quarterly, as
a servicing fee.
The Class I and Class II Plans. In addition to the payments that Distributors
or others are entitled to under each plan, each plan also provides that to
the extent the Fund, Advisers or Distributors or other parties on behalf of
the Fund, Advisers or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of each plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the Fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plans and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers or by
vote of a majority of the outstanding shares of the class. Distributors or
any dealer or other firm may also terminate their respective distribution or
service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the non-interested members of the Board, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the Board with such other
information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended October 31, 1997, the total amounts paid by the
Global Fund pursuant to the Class I and Class II plans were $144,980 and
$40,708, respectively, which were used for the following purposes:
Class I Class II
Advertising $ 4,963 $ 71
Printing and mailing
of prospectuses
other than to current
shareholders $ 30,833 $ 619
Payments to
underwriters $ 4,655 $24,643
Payments to
broker-dealers $104,529 $15,375
For the fiscal year ended October 31, 1997, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans shown and the amounts the Fund paid
Distributors under the plans were as follows:
Distributors' Amount
Eligible Paid by
Expenses Fund
Short-Intermediate Fund
- Class I $194,293 $160,794
Convertible Fund
- Class I 445,983 417,735
Equity Fund
- Class I 800,400 759,406
Convertible Fund
- Class II 326,559 212,316
Equity Fund
- Class II 400,103 311,940
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
Fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation. An explanation of these and other
methods used by the Fund to compute or express performance follows.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum front-end sales charge reflected in each quotation
is a one time fee charged on all direct purchases, which will have its
greatest impact during the early stages of your investment. This charge will
affect actual performance less the longer you retain your investment in the
Fund. The average annual total return for the indicated periods ended October
31, 1997, was as follows:
Inception From
Fund Name Date One-Year Five-YearTen-Year Inception
Global Fund - Class I 03/15/88 0.15% 6.63% N/A 7.09%
Global Fund - Class II 05/01/95 1.94% N/A N/A 8.75%
Short-Intermediate Fund 04/15/87 3.46% 4.82% 6.77% 6.75%
Convertible Fund - Class I 04/15/87 16.99% 15.55% 13.62% 11.87%
Convertible Fund - Class II 10/02/95 19.29% N/A N/A 16.20%
Equity Fund - Class I 03/15/88 18.83% 14.64% N/A 13.41%
Equity Fund - Class II 10/02/95 21.15% N/A N/A 17.16%
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 front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for the
indicated periods ended October 31, 1997 was as follows:
Inception From
Fund Name Date One-Year Five-YearTen-Year Inception
Global Fund - Class I 03/15/88 0.15% 38.97% N/A 95.06%
Global Fund - Class II 05/01/95 1.94% N/A N/A 23.36%
Short-Intermediate Fund 04/15/87 3.46% 26.55% 92.56% 99.24%
Convertible Fund - Class I 04/15/87 16.99% 106.00% 258.50% 226.30%
Convertible Fund - Class II 10/02/95 19.29% N/A N/A 36.67%
Equity Fund - Class I 03/15/88 18.83% 97.99% N/A 236.01%
Equity Fund - Class II 10/02/95 21.15% N/A N/A 39.03%
YIELD
Current Yield. Current yield of each class shows the income per share earned
by the Fund. It is calculated by dividing the net investment income per share
of each class earned during a 30-day base period by the applicable maximum
Offering Price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of the class during the base period. The yield for each class
for the 30-day period ended October 31, 1997, was as follows:
Fund Name
Global Fund - Class I 5.43%
Global Fund - Class II 4.87%
Short-Intermediate Fund 4.97%
Convertible Fund - Class I 3.02%
Convertible Fund - Class II 2.36%
Equity Fund - Class I 3.05%
Equity Fund - Class II 2.39%
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
----
cd
where:
a = dividends, if any, 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, if any,
and short-term capital gains, and is calculated over a different period of
time. The current distribution rate for each class for the 30-day period
ended October 31, 1997, was as follows:
Fund Name
Global Fund - Class I 6.83%
Global Fund - Class II 6.56%
Short-Intermediate Fund 5.47%
Convertible Fund - Class I 3.89%
Convertible Fund - Class II 3.30%
Equity Fund - Class I 3.09%
Equity Fund - Class II 2.47%
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The Fund may include in its advertising or sales material information
relating to investment objectives and performance results of funds belonging
to the Franklin Templeton Group of Funds. Resources is the parent company of
the advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) Lipper- Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
d) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
e) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
f) Financial publications: The Wall Street Journal, and Business Week,
Changing Times, Financial World, Forbes, Fortune, and Money magazines -
provide performance statistics over specified time periods.
g) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
h) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
i) Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, and mortgage
bonds.
j) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
k) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage, and
Yankee bonds.
l) Standard & Poor's Bond Indices - measures yield and price of corporate,
municipal and government bonds.
m) 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.
n) 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.
p) IBC's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.
q) 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.
r) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the Fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, 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.
In promoting the sale of Fund shares, advertisements or information for the
Fund may also include quotes from Benjamin Franklin, especially Poor
Richard's Almanac.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years
and now services more than 2.9 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 $221 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
120 U.S. based open-end investment companies to the public. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.
The Short-Intermediate Fund is eligible for investment by the National Marine
Fisheries Service Capital Construction Funds.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment objectives, no two are
exactly alike. As noted in the Prospectus, shares of the Fund are generally
sold through Securities Dealers. Investment representatives of such
Securities Dealers are experienced professionals who can offer advice on the
type of investment suitable to your unique goals and needs, as well as the
types of risks associated with such investment
As of February 2, 1998, the principal shareholders of the Fund, beneficial or
of record, were as follows:
Name and Address Share Amount Percentage
Global Fund - Advisor Class
Franklin Templeton Trust Company
As Trustee for ValuSelect
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 74,405.354 84.02%
Short-Intermediate Fund - Advisor Class
Elwood H. Weilage & Dorothy C. Weilage
& Henry H. Weilage Jt. Ten.
4615 Holly Drive
Palm Beach Gardens, FL 33418 5,855.477 5.86%
Templeton Funds Trust Company
700 Central Avenue
Saint Petersburg, FL 33701-3628 62,775.200 62.79%
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the Fund and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund. The Declaration of Trust
further provides that the Fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the Fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the Fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
Fund's total assets. Thus, the risk of you incurring financial loss on
account of shareholder liability is limited to the unlikely circumstances in
which both inadequate insurance exists and the Fund itself is unable to meet
its obligations.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed 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; and (iii) all brokerage
accounts must be disclosed on an annual basis; (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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended October 31, 1997,
including the auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Directors Trustees of the Trust
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Global Fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class." The
Short-Intermediate Fund offers two classes of shares, designated "Class I"
and "Advisor Class." The Convertible Fund and the Equity Fund each offer two
classes of shares, designated "Class I" and "Class II." The classes have
proportionate interests in the Fund's portfolio. They differ, however,
primarily in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investment Counsel - Templeton Investment Counsel, Inc., the Global Fund's
sub-advisor
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I of Global Government Income
Fund, 2.25% for Class I of the Short-Intermediate U.S. Government Fund, 4.50%
for Class I of the Convertible Securities Fund and the Equity Income Fund,
and 1% for Class II of the Global Government Income Fund, the Convertible
Securities Fund, and the Equity Income Fund.
Prospectus - The prospectus for the Fund's Class I and, if offered, Class II
shares dated March 1, 1998, as may be amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these
terms refer to the Fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Portfolio Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendices
Summary of Procedures to
Monitor Conflicts of Interest..............................
Description of Ratings......................................
- -----------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with
capital letters. This means the term is explained under "Useful
Terms and Definitions."
- -----------------------------------------------------------------------
The Franklin Adjustable U.S. Government Securities Fund (the "Adjustable U.S.
Government Fund") and the Franklin Adjustable Rate Securities Fund (the
"Adjustable Rate Securities Fund") are diversified series of Franklin
Investors Securities Trust (the "Trust"), an open-end management investment
company. Each series may individually or together be referred to as the
"Fund(s)".
The Fund's investment objective is to seek a high level of current income,
consistent with lower volatility of principal. The Adjustable U.S. Government
Fund seeks to achieve its objective by investing all of its assets in shares
of the U.S. Government Adjustable Rate Mortgage Portfolio (the "Mortgage
Portfolio"). The Mortgage Portfolio in turn invests primarily in
adjustable-rate mortgage securities ("ARMS") or other securities
collateralized by or representing an interest in mortgages and that have
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.
The Adjustable Rate Securities Fund seeks to achieve its objective by
investing all of its assets in shares of the Adjustable Rate Securities
Portfolio (the "Securities Portfolio"). The Securities Portfolio in turn
invests primarily in adjustable-rate securities collateralized by or
representing an interest in mortgages, 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 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 Advisers determines that they are of comparable quality to the
ratings above.
The Mortgage Portfolio and the Securities Portfolio may individually or
together be referred to as the "Portfolio(s)". The Portfolio is a series of
the Adjustable Rate Securities Portfolios. Its investment objective is the
same as the Fund's.
The Prospectus, dated March 1, 1998, as may be amended from time to time,
contains the basic information you should know before investing in the Fund.
For a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Portfolio may buy and its investment policies. You should read it
together with the section in the Prospectus entitled "How Does the Fund
Invest Its Assets?"
The investment policies of the Fund are substantially similar to those
described below for the corresponding Portfolio except, in all cases, the
Fund may pursue its policies by investing in an open-end management
investment company with the same investment objective and substantially
similar policies and restrictions as the Fund.
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. Advisers 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.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS ("REMICS"). To the extent indicated in the Prospectus,
the Portfolio may invest in CMOs, and the Securities Portfolio may also
invest in REMICs. 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. The Mortgage
Portfolio will not invest in privately issued CMOs or REMICs.
ASSET-BACKED SECURITIES. The Securities Portfolio may invest in asset-backed
securities. The rate of principal payments 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. The Securities Portfolio will not pay any
additional fees for credit support, although the existence of credit support
may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior subordinated securities" (multiple class securities with one
or more classes 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. The Securities Portfolio may invest up to 5% of its total assets in
inverse floaters. Inverse floaters are instruments with floating or variable
interest rates that move in the opposite direction of short-term interest
rates and move at an accelerated speed. The 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.
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.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the Fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the Fund or
(ii) 67% or more of the shares of the Fund present at a shareholder meeting
if more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy, whichever is less. The Fund MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 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 Prospectus.
3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act. To the extent permitted by exemptions which may be
granted under the 1940 Act, the Portfolio may invest in shares of one or more
money market funds managed by 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.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the
Fund intends 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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk(*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 28 of the investment companies in
the Franklin Templeton Group of Funds.
Harris J. Ashton (65)
191 Clapboard Ridge
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 52 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 (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or
trustee, as the case may be, of 54 of the investment companies in the
Franklin Templeton Group of Funds; and formerly Director, General Host
Corporation (nursery and craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present); formerly, chairman (1995-1997) and trustee
(1993-1997) of 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); and trustee or
director of 24 of the investment companies in the Franklin Templeton Group of
Funds.
*Edward B. Jamieson (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of five of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (65)
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 53 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (57)
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
56 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68)
20833 Stevens Creek Blvd., Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
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 56 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
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.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
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.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41)
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.; President, Chief Executive Officer, Chief
Investment Officer and Director, Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 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 RATE PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS SECURITIES PORTFOLIOS DURING THE PAST FIVE YEARS
William J. Lippman (73)
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.
The tables above show the officers, Board members and the trustees of the
Adjustable Rate Securities Portfolios who are affiliated with Distributors
and Advisers. Nonaffiliated members of the Board are currently paid $925 per
month plus $925 per meeting attended. Nonaffiliated trustees of Adjustable
Rate Securities Portfolios are currently paid $50 per month plus $50 per
meeting attended. As shown above, the nonaffiliated Board members and
trustees of the Adjustable Rate Securities Portfolios also serve as directors
or trustees of other investment companies in the Franklin Templeton Group of
Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members
and trustees of the Adjustable Rate Securities Portfolios by the Trust, by
the Adjustable Rate Securities Portfolios, and by other funds in the Franklin
Templeton Group of Funds.
TOTAL FEES NUMBER OF
TOTAL FEES RECEIVED FROM BOARDS IN THE
TOTAL FEES RECEIVED THE FRANKLIN FRANKLIN
RECEIVED FROM THE TEMPLETON TEMPLETON GROUP
NAME FROM THE PORTFOLIOS* GROUP OF OF FUNDS ON
TRUST* FUNDS** WHICH EACH
SERVES***
- --------------------------------------------------------------------------------
Frank H. Abbott, III$21,275 $1,150 $165,937 28
Harris J. Ashton 21,275 1,150 344,642 52
S. Joseph Fortunato 21,275 1,150 361,562 54
David W. Garbellano+ 16,650 900 91,317 N/A
Edith Holiday++ 0 0 72,875 24
Frank W.T. LaHaye 20,350 1,100 141,433 27
Gordon S. Macklin 21,275 1,150 337,292 51
*For the fiscal year ended October 31, 1997.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members and trustees of Adjustable Rate Securities
Portfolios are responsible. The Franklin Templeton Group of Funds currently
includes 57 registered investment companies, with approximately 170 U.S.
based funds or series.
+Deceased, September 27, 1997.
++ELECTED TO THE BOARD JANUARY 15, 1998.
Nonaffiliated members of the Board and trustees of the Adjustable Rate
Securities Portfolios are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No
officer or Board member or trustee of the Adjustable Rate Securities
Portfolios received any other compensation, including pension or retirement
benefits, directly or indirectly from the Fund, the Adjustable Rate
Securities Portfolios, or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members and trustees of the Adjustable Rate
Securities Portfolios who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of February 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 221
shares of the Adjustable U.S. Government Fund and 210 shares of the
Adjustable Rate Securities Fund, or less than 1% of the total outstanding
shares of each Fund's shares. Many of the Board members also own shares in
other funds in the Franklin Templeton Group of Funds. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively,
of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND ADMINISTRATOR AND SERVICES PROVIDED. Advisers is the
investment manager of the Portfolio and is also the administrator of the
Fund. Advisers provides investment research and portfolio management
services, including the selection of securities for the Portfolio to buy,
hold or sell and the selection of brokers through whom the Portfolio's
portfolio transactions are executed. Advisers' activities are subject to the
review and supervision of the Board of Trustees of the Adjustable Rate
Securities Portfolios to whom Advisers renders periodic reports of the
Portfolio's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund
and the Portfolio.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Portfolio.
Similarly, with respect to the Portfolio, Advisers is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling
any security that Advisers and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Advisers is not obligated to refrain from investing in securities held
by the Portfolio or other funds that it manages. Of course, any transactions
for the accounts of Advisers and other access persons will be made in
compliance with the Portfolio's Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."
MANAGEMENT AND ADMINISTRATION FEES. Under its management agreement, the
Portfolio pays Advisers a management fee equal to an annual rate of 40/100 of
1% of average daily net assets up to and including $5 billion; 35/100 of 1%
of net assets in excess of $5 billion up to and including $10 billion; 33/100
of 1% of net assets in excess of $10 billion up to and including $15 billion;
and 30/100 of 1% of net assets in excess of $15 billion. The fee is computed
at the close of business on the last business day of each month.
Advisers provides various administrative, statistical, and other services to
the Fund. Under its administration agreement, the Fund pays Advisers an
administration fee equal to an annual rate of 10/100 of 1% of the value of
the Fund's average daily net assets up to and including $5 billion; 9/100 of
1% of net assets in excess of $5 billion up to and including $10 billion; and
8/100 of 1% of net assets in excess of $10 billion. The fee is computed at
the close of business on the last business day of each month.
For the fiscal years ended October 31, 1995, 1996 and 1997, management fees
of the Mortgage Portfolio, before any advance waiver, totaled $2,456,413,
$1,891,159, and $1,487,256, respectively. For the same periods,
administration fees totaling $584,957, $462,426, and $363,663 were paid to
Advisers by the Adjustable U.S. Government Fund. For the same period,
management fees of the Securities Portfolio, before any advance waiver,
totaled $119,324, $89,969, and $96,727, respectively. Administration fees of
the Adjustable Rate Securities Fund, before any advance waiver, totaled
$19,936, $15,384, and $19,960. Under an agreement by Advisers to limit its
fees, the Mortgage Portfolio paid management fees totaling $968,077,
$1,090,876 and $830,598, the Securities Portfolio paid management fees
totaling $55,384, $41,378 and $51,453, and the Adjustable Rate Securities
Fund paid administration fees totaling $14,087, $15,384 and $19,960 for the
same periods.
MANAGEMENT AGREEMENT. The management agreement for the Portfolio is in effect
until February 28, 1999. It may continue in effect for successive annual
periods if its continuance is specifically approved at least annually by a
vote of the Board of Trustees of the Adjustable Rate Securities Portfolios or
by a vote of the holders of a majority of the Portfolio's outstanding voting
securities, and in either event by a majority vote of the trustees of the
Adjustable Rate Securities Portfolios who are not parties to the management
agreement or interested persons of any such party (other than as members of
the Board of Trustees of the Adjustable Rate Securities Portfolios), cast in
person at a meeting called for that purpose. The management agreement may be
terminated without penalty at any time by the Board of Trustees of the
Adjustable Rate Securities Portfolios or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities on 60 days' written
notice to Advisers, or by Advisers on 60 days' written notice to the
Portfolio, and will automatically terminate in the event of its assignment,
as defined in the 1940 Act.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. 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. Investor Services, in its capacity as the transfer agent for the
Portfolio, effectively acts as the Fund's custodian and holds the Fund's
shares of the Portfolio on its books. Bank of New York, Mutual Funds
Division, 90 Washington Street, New York, New York 10286, acts as custodian
of the Fund's cash, pending investment in shares of the Portfolio. Bank of
New York also acts as custodian of the securities and other assets of the
Portfolio. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the fiscal year
ended October 31, 1997, their auditing services consisted of rendering an
opinion on the financial statements of the Trust included in the Trust's
Annual Report to Shareholders for the fiscal year ended October 31, 1997.
HOW DOES THE PORTFOLIO BUY SECURITIES FOR ITS PORTFOLIO?
The Fund will not incur any brokerage or other costs in connection with its
purchase or redemption of shares of the Portfolio.
Since most purchases by the Portfolio are principal transactions at net
prices, the Portfolio incurs little or no brokerage costs. The Portfolio
deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker. Purchases of portfolio securities from underwriters
will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask prices. The Portfolio seeks to obtain prompt execution of orders at
the most favorable net price. Transactions may be directed to dealers in
return for research and statistical information, as well as for special
services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Portfolio tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Portfolio, any portfolio securities tendered by the Portfolio
will be tendered through Distributors if it is legally permissible to do so.
In turn, the next management fee payable to Advisers will be reduced by the
amount of any fees received by Distributors in cash, less any costs and
expenses incurred in connection with the tender.
If purchases or sales of securities of the Portfolio and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the Portfolio is concerned. In other cases it is possible
that the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Portfolio.
During the fiscal years ended October 31, 1995, 1996 and 1997, the Portfolio
paid no brokerage commissions.
As of October 31, 1997, neither the Fund nor the Portfolio owned securities
of its regular broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, shares may be offered
with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
Under $30,000 3%
$30,000 but less than $100,000 2%
$100,000 but less than $400,000 1%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of $1 million or more: 0.75% on sales of $1
million to $2 million, plus 0.60% on sales over $2 million to $3 million,
plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales over
$50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to Securities Dealers who initiate and are
responsible for purchases by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million. Distributors may make
these payments in the form of contingent advance payments, which may be
recovered from the Securities Dealer or set off against other payments due to
the dealer if shares are sold within 12 months of the calendar month of
purchase. Other conditions may apply. All terms and conditions may be imposed
by an agreement between Distributors, or one of its affiliates, and the
Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
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, however, those who have shown an interest in the
Franklin Templeton Funds are more likely to be considered. To the extent
permitted by their firm's policies and procedures, a registered
representative's expenses in attending these meetings may be covered by
Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Fund shares, as described in the Prospectus. At any time within 90 days after
the first investment that you want to qualify for a reduced sales charge, you
may file with the Fund a signed shareholder application with the Letter of
Intent section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period, except
in the case of certain retirement plans, will be subtracted from the amount
of the purchases for purposes of determining whether the terms of the Letter
have been completed. If the Letter is not completed within the 13 month
period, there will be an upward adjustment of the sales charge, depending on
the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the
sales charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your
name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions,
equal the amount specified under the Letter, the reserved shares will be
deposited to an account in your name or delivered to you or as you direct. If
total purchases, less redemptions, exceed the amount specified under the
Letter and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the Securities
Dealer through whom purchases were made pursuant to the Letter (to reflect
such further quantity discount) on purchases made within 90 days before and
on those made after filing the Letter. The resulting difference in Offering
Price will be applied to the purchase of additional shares at the Offering
Price applicable to a single purchase or the dollar amount of the total
purchases. If the total purchases, less redemptions, are less than the amount
specified under the Letter, you will remit to Distributors an amount equal to
the difference in the dollar amount of sales charge actually paid and the
amount of sales charge that would have applied to the aggregate purchases if
the total of the purchases had been made at a single time. Upon remittance,
the reserved shares held for your account will be deposited to an account in
your name or delivered to you or as you direct. If within 20 days after
written request the difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account before fulfillment of
the Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve
5% of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares of the Adjustable U.S. Government Fund acquired
through the reinvestment of dividends will be purchased at the Net Asset
Value determined on the business day following the dividend record date
(sometimes known as the "ex-dividend date"). The processing date for the
reinvestment of dividends may vary and does not affect the amount or value of
the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your Adjustable U.S.
Government Fund account, declared but unpaid income dividends and capital
gain distributions will be exchanged into the new fund and will be invested
at Net Asset Value. If you request the exchange of the total value of your
Adjustable Rate Securities Fund account, accrued but unpaid income dividends
and capital gain distributions will be reinvested in the Fund at the Net
Asset Value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund. Backup withholding and information
reporting may apply. Information regarding the possible tax consequences of
an exchange is included in the tax section in this SAI and in the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the Fund's
investment objective exist immediately. This money will then be withdrawn
from the short-term, money market instruments and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the fifth business day following the sale. The funds you
are seeking to exchange into may delay issuing shares pursuant to an exchange
until that fifth business day. The sale of Fund shares to complete an
exchange will be effected at Net Asset Value at the close of business on the
day the request for exchange is received in proper form. Please see "May I
Exchange Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
Fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the Fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the Fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the Fund may reimburse
Investor Services an amount not to exceed the per account fee that the Fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the Fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Portfolio,
cash and receivables are valued at their realizable amounts. Interest is
recorded as accrued and dividends are recorded on the ex-dividend date.
Portfolio securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily available are
valued at the last quoted sale price of the day or, if there is no such
reported sale, within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the Net Asset Value of the Fund's shares is determined as of such times.
Occasionally, events affecting the values of these securities may occur
between the times at which they are determined and the close of the NYSE that
will not be reflected in the computation of the Fund's Net Asset Value. If
events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in
good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board of Trustees of the
Adjustable Rate Securities Portfolios. With the approval of the Board of
Trustees of the Adjustable Rate Securities Portfolios, the Portfolio may
utilize a pricing service, bank or Securities Dealer to perform any of the
above described functions.
ADDITIONAL INFORMATION ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund earns income and gains on
its investment in the Portfolio. The Portfolio, in turn, earns income
generally in the form of interest, original issue, market, and acquisition
discount, and other income derived from its investments. This income,
together with the excess of any net short-term capital gain over net
long-term capital loss realized by the Portfolio, less expenses incurred in
the operation of the Portfolio, is paid to the Fund as ordinary dividend
income. The ordinary dividend income received from the Portfolio, less
expenses incurred in the operation of the Fund, constitute 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 receive capital gain
distributions from the Portfolio in which it invests, consisting of the
excess of any net long-term capital gain over net short-term capital loss
realized by the Portfolio on sale or disposition of its underlying portfolio
securities. The Fund may also derive capital gains and losses in connection
with the sale of portfolio shares. Distributions derived from the excess of
net short-term capital gain over net long-term capital loss will be taxable
to you as ordinary income. Distributions derived from the excess of net
long-term capital gain over net short-term capital loss, 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
the Fund. Any net short-term or long-term capital gains realized by the Fund
(net of any capital loss carryovers) generally will be distributed once each
year, and may be distributed more frequently, if necessary, in order to
reduce or eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required
to report the capital gain distributions paid to you from gains realized on
the sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities the Fund sold after July
28, 1997, that it held for more than one year but not more than 18 months,
and securities the Fund sold before May 7, 1997, that it held for more than
one year. These gains will be taxable to individual investors at a maximum
rate of 28%.
"20% RATE GAINS": gains resulting from securities the Fund sold after July
28, 1997, that it held for more than 18 months, and under a transitional
rule, securities the Fund sold between May 7 and July 28, 1997, (inclusive)
that it held for more than one year. These gains will be taxable to
individual investors at a maximum rate of 20% for individual investors in the
28% or higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8%
for individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than 5 years which are sold after December
31, 2000. For individuals who are subject to tax at higher rates, qualified
5-year gains are net gains on securities which are purchased after December
31, 2000, and are held for more than 5 years. Taxpayers subject to tax at
the higher rates may also make an election for shares held on January 1,
2001, to recognize gain on their shares in order to qualify such shares as
qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to
include 1997 Act tax law changes, and may be obtained by calling Fund
Information. You should consult your personal tax advisor for questions
concerning your personal tax reporting.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November, or December and paid to you in January of the following
year will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The Fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed 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.
TAXES
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
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. 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 you. 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 available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, the
Fund must meet certain specific requirements, including the following:
o The Fund must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Fund's
total assets, and, with respect to 50% of the Fund's total assets, no
investment (other than cash and cash items, U.S. government securities,
and securities of other regulated investment companies) can exceed 5%
of the Fund's total assets;
o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities, or foreign currencies, or
other income derived with respect to its business of investing in such
stock, securities, or currencies; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal
years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The Fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and 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. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. 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 for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange.
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. The
holding periods and categories of capital gain that apply under the 1997 Act
are described above in the "DISTRIBUTIONS" section.
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 purchase 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. All or a portion of the sales charge that you paid for
your shares in the Fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the Fund or in another fund in the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold 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. It is anticipated, however, that no portion of the Fund's
distributions 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 Fund does so only indirectly by investing in Portfolio
shares.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the Fund's income is
attributable primarily to interest derived by the Portfolio, no portion of
the Fund's distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the Fund for the
most recent fiscal year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
CONVERSION TRANSACTIONS. Gains realized by the Portfolio from transactions
that are deemed to be "conversion transactions" under the Code, and that
would otherwise produce capital gain, may be recharacterized as ordinary
income to the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Portfolio's expected return is
attributable to the time value of the Portfolio's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
section 263(g) of the Code dealing with capitalized carrying costs.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. The
Portfolio's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed-interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the Portfolio to recognize income and make
distributions to the Fund prior to its receipt of cash payments. Zero coupon
and delayed-interest bonds are normally issued at a discount and are
therefore generally subject to tax reporting as OID obligations. The
Portfolio is required to accrue as income a portion of the discount at which
these securities were issued, and to distribute such income each year (as
ordinary dividends) in order to maintain its qualification as a regulated
investment company and to avoid income reporting and excise taxes at the
Portfolio level. PIK bonds are subject to similar tax rules concerning the
amount, character, and timing of income required to be accrued by the
Portfolio. Bonds acquired in the secondary market for a price less than
their stated redemption price, or revised issue price in the case of a bond
having OID, are said to have been acquired with market discount. For these
bonds, the Portfolio may elect to accrue market discount on a current basis,
in which case the Portfolio will be required to distribute any such accrued
discount. If the Portfolio does not elect to accrue market discount into
income currently, gain recognized on sale will be recharacterized as ordinary
income instead of capital gain to the extent of any accumulated market
discount on the obligation.
DEFAULTED OBLIGATIONS. The Portfolio may be required to accrue income on
defaulted obligations and to distribute such income to the Fund even though
it is not currently receiving interest or principal payments on such
obligations. In order to generate cash to satisfy these distribution
requirements, the Portfolio may be required to dispose of its underlying
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Portfolio shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
In connection with the offering of the Adjustable U.S. Government Fund's
shares, aggregate underwriting commissions for the fiscal years ended October
31, 1995, 1996 and 1997 were $121,256, $151,651, and $160,892, respectively.
In connection with the offering of the Adjustable Rate Securities Fund's
shares, aggregate underwriting commissions for the same periods were $12,586,
$24,584 and $95,835, respectively. After allowances to dealers, Distributors
retained $12,155, $19,401 and $22,069 for the Adjustable U.S. Government Fund
and $1,366, $3,268 and $14,072 for the Adjustable Rate Securities Fund in net
underwriting discounts and commissions and received $0, $35 and $0 in
connection with redemptions or repurchases of Adjustable U.S. Government Fund
shares for the respective years. Distributors may be entitled to
reimbursement under the Rule 12b-1 plan, as discussed below. Except as noted,
Distributors received no other compensation from the Fund for acting as
underwriter.
THE RULE 12B-1 PLAN
The Fund has adopted a distribution plan or "Rule 12b-1 plan" pursuant to
Rule 12b-1 of the 1940 Act. Under the plan, the Fund may pay up to a maximum
of 0.25% per year of its average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of its shares.
In addition to the payments that Distributors or others are entitled to under
the plan, the plan also provides that to the extent the Fund, Advisers or
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be for the financing of any activity
primarily intended to result in the sale of shares of the Fund within the
context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed
to have been made pursuant to the plan.
In no event shall the aggregate asset-based sales charges, which include
payments made under the plan, plus any other payments deemed to be made
pursuant to the plan, exceed the amount permitted to be paid under the rules
of the NASD.
The terms and provisions of the plan relating to required reports, term, and
approval are consistent with Rule 12b-1. The plan does not permit
unreimbursed expenses incurred in a particular year to be carried over to or
reimbursed in later years.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plan as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plan for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the Fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
The plan has been approved in accordance with the provisions of Rule 12b-1.
The plan is renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the plan,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plan and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers, or the
underwriting agreement with Distributors, or by vote of a majority of the
Fund's outstanding shares. Distributors or any dealer or other firm may also
terminate their respective distribution or service agreement at any time upon
written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a
majority of the Fund's outstanding shares, and all material amendments to the
plan or any related agreements shall be approved by a vote of the
non-interested members of the Board, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the plan and any related
agreements, as well as to furnish the Board with such other information as
may reasonably be requested in order to enable the Board to make an informed
determination of whether the plan should be continued.
For the fiscal year ended October 31, 1997, Distributors had eligible
expenditures of $951,379 and $60,668 for the Adjustable U.S. Government Fund
and the Adjustable Rate Securities Fund, respectively, for advertising,
printing, and payments to underwriters and broker-dealers pursuant to the
plan, of which the Fund paid Distributors $891,507 and $40,208, respectively.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
Fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation. An explanation of these and other
methods used by the Fund to compute or express performance follows.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for the indicated periods ended October 31,
1997, was as follows:
INCEPTION ONE-YEAR FIVE-YEAR TEN-YEAR FROM
DATE PERIOD PERIOD PERIOD INCEPTION
Adjustable U.S.
Government Fund 10/20/8 74.72% 3.76% 5.75% 5.73%
Adjustable Rate
Securities Fund 12/26/9 14.32% 4.89% N/A 5.02%
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 front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above.
The cumulative total return for the indicated periods ended October 31, 1997,
was as follows:
INCEPTION ONE-YEAR FIVE-YEAR TEN-YEAR FROM
DATE PERIOD PERIOD PERIOD INCEPTION
Adjustable U.S.
Government Fund 10/20/8 74.72% 20.29% 74.92% 74.92%
Adjustable Rate
Securities Fund 12/26/91 4.32% 26.98% N/A 33.13%
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the maximum Offering Price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
The Adjustable U.S. Government Fund's yield for the 30-day period ended
October 31, 1997, was 5.53%, and the Adjustable Rate Securities Fund's yield
for the same period was 5.68%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [(A-B + 1) - 1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders. Amounts paid to shareholders are reflected in the quoted
current distribution rate. The current distribution rate is usually computed
by annualizing the dividends paid per share during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as short-term capital gains, and is calculated over a
different period of time. The Adjustable U.S. Government Fund's current
distribution rate for the 30-day period ended October 31, 1997, was 5.69% and
the Adjustable Rate Securities Fund's current distribution rate for the same
period was 5.68%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The Fund may include in its advertising or sales material information
relating to investment objectives and performance results of funds belonging
to the Franklin Templeton Group of Funds. Resources is the parent company of
the advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income Fund
Performance Analysis, Lipper - Mutual Fund Yield Survey, and Lipper - Mutual
Fund Indices - measure total return and average current yield for the mutual
fund industry and rank individual mutual fund performance over specified time
periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
d) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
e) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
f) Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
g) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
h) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
i) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
j) Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
k) 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.
l) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
m) Standard & Poor's Bond Indices - measure yield and price of corporate,
municipal, and government bonds.
n) Other taxable investments, including CD's, money market deposit, checking
accounts, savings accounts, money market mutual funds, and repurchase
agreements.
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.
p) Internal Business Communications Money Fund Report - industry averages for
seven-day annualized and compounded yields of taxable, tax-free and
government money funds.
q) Merrill Lynch Corporate Master Index - reflects Investment Grade (BB/Baa
or better) corporate debt. It represents a cross-section of industries with
maturities ranging from 1 to 15 years.
r) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the Fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the
Portfolio's fixed-income investments, as well as the value of its and the
corresponding Fund's 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 Portfolio's and thus the corresponding 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.
From time to time, the Adjustable U.S. Government Fund may advertise offers
for the general public to attend free seminars where a guest speaker will
discuss the benefits of investing in Franklin's professionally managed
portfolio of U.S. government securities.
In addition, in promoting the sale of Fund shares, advertisements or
information for the Fund may also include quotes from Benjamin Franklin,
especially Poor Richard's Almanac.
The Adjustable U.S. Government Fund was the first investment company in the
U.S. to invest primarily in mortgage-backed securities based upon adjustable
rate mortgage obligations.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years
and now services more than 2.9 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 $221 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
120 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
NYSE. While many of them have similar investment objectives, no two are
exactly alike. As noted in the Prospectus, shares of the Fund are generally
sold through Securities Dealers. Investment representatives of such
Securities Dealers are experienced professionals who can offer advice on the
type of investment suitable to your unique goals and needs, as well as the
types of risks associated with such investment.
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Fund, no other person holds
beneficially or of record more than 5% of the Fund's outstanding shares.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Trust's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the Fund and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund. The Declaration of Trust
further provides that the Fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the Fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the Fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
Fund's total assets. Thus, the risk of you incurring financial loss on
account of shareholder liability is limited to the unlikely circumstances in
which both inadequate insurance exists and the Fund itself is unable to meet
its obligations.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended October 31, 1997,
including the auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Portfolio's investment manager and
the Fund's administrator
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I - Certain funds in the Franklin Templeton Funds offer multiple
classes of shares. The different classes have proportionate interests in the
same portfolio of investment securities. They differ, however, primarily in
their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class I shares,
shares of the Fund are considered Class I shares for redemption, exchange and
other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share and includes the front-end sales charge. The maximum front-end
sales charge is 2.25%.
PROSPECTUS - The prospectus for the Fund dated March 1, 1998, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the Fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDICES
SUMMARY OF PROCEDURES TO
MONITOR CONFLICTS OF INTEREST
The Board of Trustees of the Adjustable Rate Securities Portfolios, on behalf
of its series ("master funds"), and the Board on behalf of the Fund ("feeder
fund") (both of which, except in the case of three trustees, are composed of
the same individuals) recognize that there is the potential for certain
conflicts of interest to arise between the master fund and the feeder fund in
this format. These potential conflicts of interest could include, among
others: the creation of additional feeder funds with different fee
structures; the creation of additional feeder funds that could have
controlling voting interests in any pass-through voting which could affect
investment and other policies; a proposal to increase fees at the master fund
level; and any consideration of changes in fundamental policies at the master
fund level that may or may not be acceptable to a particular feeder fund.
In recognition of the potential for conflicts of interest to develop, the
Board of Trustees of Adjustable Rate Securities Portfolios and the Board of
the Trust have adopted certain procedures under which i) management of the
master fund and the feeder fund will, on a yearly basis, report to each
board, including the independent members of each board, on the operation of
the master/feeder fund structure; ii) the independent members of each board
will have ongoing responsibility for reviewing all proposals at the master
fund level to determine whether any proposal presents a potential for a
conflict of interest and to the extent any other potential conflicts arise
before the normal annual review, they will act promptly to review the
potential conflict; iii) if the independent members of each board determine
that a situation or proposal presents a potential conflict, they will request
a written analysis from the master fund management describing whether the
apparent potential conflict of interest will impede the operation of the
constituent feeder fund and the interests of the feeder fund's shareholders;
and iv) upon receipt of the analysis, the independent members of each board
shall review the analysis and present their conclusion to the full boards.
If no actual conflict is deemed to exist, the independent board members will
recommend that no further action be taken. If the analysis is inconclusive,
they may submit the matter to and be guided by the opinion of independent
legal counsel issued in a written opinion. If a conflict is deemed to exist,
they may recommend one or more of the following actions: i) suggest a course
of action designed to eliminate the potential conflict of interest; ii) if
appropriate, request that the full boards submit the potential conflict to
shareholders for resolution; iii) recommend to the full boards that the
affected feeder fund no longer invest in its designated master fund and
propose either a search for a new master fund in which to invest the feeder
fund's assets or the hiring of an investment manager to manage the feeder
fund's assets in accordance with its objectives and policies; iv) recommend
to the full boards that a new board be recommended to shareholders for
approval; or v) recommend such other action as may be considered appropriate.
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa- Bonds rated Aa are judged to be 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. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - ADVISOR CLASS
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND - ADVISOR CLASS
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.........................
What Are the Risks of Investing in the Fund?.................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Fund Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix ....................................................
Description of Ratings......................................
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When reading this SAI, you will see certain terms beginning with
capital letters. This means the term is explained under "Useful
Terms and Definitions."
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The Franklin Global Government Income Fund (the "Global Government Income
Fund") is a non-diversified series of Franklin Investors Securities Trust
(the "Trust"), an open-end management investment company. The Franklin
Short-Intermediate U.S. Government Securities Fund (the "Short-Intermediate
U.S. Government Fund") is a diversified series of the Trust. Each series may
individually or together be referred to as the "Fund(s)." The Global
Government Income Fund's investment objective is to provide high current
income, consistent with preservation of capital; capital appreciation is a
secondary consideration. The Global Government Income Fund seeks to achieve
its objective by investing primarily in debt securities issued by domestic
and foreign governments. The Short-Intermediate U.S. Government Fund's
investment objective is to provide as high a level of current income as is
consistent with prudent investing while seeking preservation of shareholders'
capital. The Short-Intermediate U.S. Government Fund seeks to achieve its
objective by investing in a portfolio of U.S. government securities with
primary emphasis on securities with remaining maturities of 3 1/2 years or less.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated
March 1, 1998, as may be amended from time to time, contains the basic
information you should know before investing in the Fund. For a free copy,
call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
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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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HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together
with the section in the Prospectus entitled "How Does the Fund Invest Its
Assets?"
THE GLOBAL GOVERNMENT INCOME FUND
OBLIGATIONS OF DEVELOPING COUNTRIES. The Global Government Income 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 Government Income Fund the potential for
current U.S. dollar income. These instruments are not traded on any exchange.
However, Advisers believes there may be a market for such securities either
in multinational companies wishing to purchase such assets at a discount for
further investment, or from the issuing governments which may decide to
redeem their obligations at a discount.
INTEREST RATE SWAPS. The Global Government Income Fund may participate in
interest rate swaps. An interest rate swap is the transfer between two
counterparties of interest rate obligations, one of which has an interest
rate fixed to maturity, while the other has an interest rate that changes in
accordance with changes in a designated benchmark (i.e., London Interbank
Offered Rate ("LIBOR"), prime, commercial paper, or other benchmarks). The
obligations to make repayment of principal on the underlying securities are
not exchanged. These transactions generally require the participation of an
intermediary, frequently a bank. The entity holding the fixed-rate obligation
will transfer the obligation to the intermediary, and such entity will then
be obligated to pay to the intermediary a floating rate of interest,
generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity
that has a floating-rate obligation that substantially mirrors the obligation
desired by the first party. In return for assuming a fixed obligation, the
second entity will pay the intermediary all sums that the intermediary pays
on behalf of the first entity, plus an arrangement fee and other agreed upon
fees.
Interest rate swaps 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.
OTHER FIXED-INCOME SECURITIES. As stated in the Prospectus, the Global
Government Income Fund may purchase fixed-income securities of both domestic
and foreign issuers including, among others, preference stock and all types
of long-term or short-term debt obligations, such as equipment trust
certificates, equipment lease certificates, and conditional sales contracts.
Equipment-related instruments are used to finance the acquisition of new
equipment. The instrument gives the bond-holder the first right to the
equipment in the event that interest and principal are not paid when due.
Title to the equipment is held in the name of the trustee, usually a bank,
until the instrument is paid off. Equipment-related instruments usually
mature over a period of 10 to 15 years. In practical effect, equipment trust
certificates, equipment lease certificates, and conditional sale contracts
are substantially identical; they differ mainly in legal structure. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales, or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
OPTIONS ON U.S. AND FOREIGN SECURITIES. In an effort to increase current
income and to reduce the fluctuations in Net Asset Value, the Global
Government Income 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 over-the-counter markets.
Call options written by the Global Government Income Fund give the holder the
right to buy the underlying security from the Fund at a stated exercise price
upon exercising the option at any time prior to its expiration. A call option
written by the Global Government Income Fund is "covered" if the Fund owns or
has an absolute right (such as by conversion) to the underlying security
covered by the call. A call option is also covered if the Global Government
Income Fund holds a call on the same security and in the same principal
amount as the call written and the exercise price of the call held is (a)
equal to or less than the exercise price of the call written, or (b) greater
than the exercise price of the call written if the difference is maintained
by the Fund in cash, government securities, or other high-grade debt
obligations in a segregated account with its custodian bank.
Put options written by the Global Government Income Fund give the holder the
right to sell the underlying security to the Fund at a stated exercise price.
A put option written by the Global Government Income Fund is "covered" if the
Fund maintains cash or high-grade debt obligations with a value equal to the
exercise price in a segregated account with its custodian bank, or holds a
put on the same security and in the same principal amount as the put written
and the exercise price of the put held is equal to or greater than the
exercise price of the put written.
The premium paid by the purchaser of an option will generally reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option,
supply and demand, and current interest rates.
The writer of an option who wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the Options Clearing
Corporation or otherwise economically nullified. 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. However, a writer or holder of an
option may not effect a closing purchase transaction after being notified of
the exercise of 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. If the Global Government Income Fund desires to sell a
particular security from its portfolio on which it has written a call option,
it will effect a closing transaction prior to or concurrent with the sale of
the security. There is no guarantee in any particular situation that either a
closing purchase or a closing sale transaction can be effected.
The writer of an option may have no control over when the underlying
securities must be sold in the case of a call option, or purchased in the
case of a put option, since the writer of certain options may be assigned an
exercise notice at any time prior to the expiration of the option. Whether or
not an option expires unexercised, the writer retains the amount of the
premium.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not
exist, it might not be possible to effect closing sale transactions in
particular options held by the Global Government Income Fund, with the result
that the Fund would have to exercise the options in order to realize any
profit. If the Global Government Income 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 Global Government Income 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 Global Government Income Fund will realize a loss from a closing
transaction if the price of the transaction is more than the premium received
from writing the option or is less than the premium paid to purchase the
option. Because increases in the market price of a call option written by the
Global Government Income Fund will generally be inversely related to the
market price of the underlying security, appreciation in the value of the
underlying security owned by the Fund is likely to offset in whole or in part
any loss resulting from the closing out of a call option.
The Global Government Income 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 Global Government
Income Fund may use buy-and-write transactions using in-the-money call
options when it expects that the price of the underlying security will remain
flat or decline moderately during the option period. The Global Government
Income Fund may use buy-and-write transactions using at-the-money call
options when it expects that the price of the underlying security will remain
fixed or advance moderately during the option period. The Global Government
Income Fund may use buy-and-write transactions using out-of-the-money call
options when it expects that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security
up to the exercise price will be greater than the appreciation in the price
of the underlying security alone. If the call options are exercised in such
transactions, the Global Government Income Fund's maximum gain will be the
premium received by it for writing the option, adjusted upward or downward by
the difference between the Fund's purchase price for the security and the
exercise price. If the options are not exercised and the price of the
underlying security declines, the amount of such decline will be mitigated by
the premium received.
FUTURES CONTRACTS. The Global Government Income Fund may enter into contracts
for the purchase or sale for future delivery of debt securities or currency
("futures contracts"). A "sale" of a futures contract means the acquisition
and assumption of a contractual obligation to deliver the securities or
currency called for by the contract at a specified price on a specified date.
A "purchase" of a futures contract means the acquisition of a contractual
right and obligation to acquire the securities or currency called for by the
contract at a specified price on a specified date. U.S. futures contracts
have been designed by exchanges which have been designated "contract markets"
by the Commodity Futures Trading Commission ("CFTC"), and must be executed
through a futures commission merchant or brokerage firm that is a member of
the relevant contract market. Existing contract markets for futures contracts
on debt securities include the Chicago Board of Trade, the New York Cotton
Exchange, the MidAmerica Commodity Exchange, and the International Money
Market of the Chicago Mercantile Exchange. Futures contracts trade on these
exchanges, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
The Global Government Income Fund will enter into futures contracts that are
based on foreign currencies or on debt securities that are backed by the full
faith and credit of the U.S. government, such as long-term U.S. Treasury
bonds, Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, and three-month U.S.
Treasury bills. The Global Government Income Fund may also enter into futures
contracts that are based on corporate securities and non-U.S. government debt
securities when such securities become available.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual
obligation is terminated before the settlement date of the contract without
having to make or take delivery of the securities or currency. The
termination of a contractual obligation is accomplished by buying (or
selling, as the case may be) on a commodities exchange an identical
offsetting futures contract calling for delivery in the same month. Such a
transaction, which is effected through a member of an exchange, cancels the
obligation to make or take delivery of the underlying security or currency.
Since all transactions in the futures market are made, offset, or fulfilled
through a clearinghouse associated with the exchange on which the contracts
are traded, the Global Government Income Fund will incur brokerage fees when
it purchases or sells futures contracts.
To the extent the Global Government Income Fund enters into a futures
contract, it will deposit in a segregated account with its custodian bank
cash or U.S. Treasury obligations equal to a specified percentage of the
value of the futures contract (the "initial margin"), as required by the
relevant contract market and futures commission merchant. The futures
contract will be marked-to-market daily. Should the value of the futures
contract decline relative to the Fund's position, the Fund will be required
to pay to the futures commission merchant an amount equal to such change in
value. The Global Government Income Fund may also cover its futures position
by holding a call option on the same futures contract permitting the Fund to
purchase the instrument or currency at a price no higher than the price
established in the futures contract which it sold.
The purpose of the purchase or sale of a futures contract by the Global
Government Income Fund is to attempt to protect the Fund from fluctuations in
interest or currency exchange rates without actually buying or selling
long-term, fixed-income securities or currency. For example, if the Global
Government Income 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 Global Government Income
Fund. If interest rates did increase, the value of the debt securities owned
by the Global Government Income 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 Global Government Income 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
Global Government Income Fund to maintain a defensive position without having
to sell its portfolio securities. Similarly, if the Global Government Income
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 Global Government Income Fund's
futures position.
Alternatively, when it expects that interest rates may decline, the Global
Government Income 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 Global Government Income 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 Global Government Income Fund could then buy
long-term bonds on the cash (securities) market. Similarly, if the Global
Government Income Fund intends to acquire a security or other asset
denominated in a currency that is expected to appreciate against the U.S.
dollar, the Fund may purchase futures contracts on that currency. If the
value of the foreign currency does appreciate, the increase in the value of
the futures position will offset the increased U.S. dollar cost of acquiring
the asset denominated in that currency.
The ordinary spreads between prices in the cash (securities) or foreign
currency and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
markets are subject to initial deposit and variation margin requirements.
Rather than meeting additional variation margin requirements, investors may
close futures contracts through offsetting transactions which could distort
the normal relationship between the cash (securities) or foreign currency and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus causing distortions.
Due to the possibility of such distortion, a correct forecast of general
interest rate trends by Advisers may still not result in a successful hedging
transaction.
OPTIONS ON FUTURES CONTRACTS. The Global Government Income 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
Government Income 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 Government Income 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
Government Income 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 Government Income 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 Government Income 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 Government Income 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 Government Income Fund will be able to
utilize these instruments effectively for the purposes set forth above.
Furthermore, the Global Government Income Fund's ability to engage in options
on futures transactions may be limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES. The Global Government Income 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 Global Government Income Fund may purchase
put options on the foreign currency. If the value of the currency does
decline, the Global Government Income 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 Global Government Income 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 Global Government
Income 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 Government Income 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 Government Income Fund may also write options on foreign
currencies for hedging purposes. For example, where the Global Government
Income 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
Global Government Income 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 Global Government Income
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 Government Income
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 Global Government Income 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 Global
Government Income 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 Global Government Income Fund proposes to take advantage of investment
opportunities in the area of options, futures contracts, and options on
futures contracts that are not presently contemplated for use by the Fund or
that are not currently available but which may be developed in the future, to
the extent such opportunities are both consistent with the Fund's investment
objective and policies and are legally permissible transactions for the Fund.
These opportunities, if they arise, may involve risks that are different from
those involved in the options and futures activities described above.
LOAN PARTICIPATIONS. The Global Government Income Fund may invest in loan
participations, which may have speculative characteristics. The Global
Government Income 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 Government Income 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 Government Income 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"), which operate in a variety of industries and geographical
regions. The Global Government Income Fund will purchase participation
interests in Loans that may pay interest at rates which are periodically
reset on the basis of a base lending rate plus a premium. These base lending
rates are generally the Prime Rate offered by a major U.S. bank, the LIBOR,
the CD rate, or other base lending rates used by commercial lenders. The
Loans typically have the most senior position in a Borrower's capital
structure, although some Loans may hold an equal ranking with other senior
securities of the Borrower. Although the Loans generally are secured by
specific collateral, the Global Government Income 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 Government Income Fund is not subject to any restrictions
with respect to the maturity of the Loans in which it purchases participation
interests.
Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although Advisers may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative
factor in Advisers' analysis.
Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in Loans generally are not listed on any
national securities exchange or automated quotation system, and no regular
market has developed for such interests. Any secondary purchases and sales of
loan participations generally are conducted in private transactions between
buyers and sellers. Many of the Loans in which the Global Government Income
Fund expects to purchase interests are of a relatively large principal amount
and are held by a relatively large number of owners which, in Advisers'
opinion, should enhance the relative liquidity of such interests.
When acquiring a loan participation, the Global Government Income 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 Government Income 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 Government Income 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 Government Income 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 Government Income 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.
THE SHORT-INTERMEDIATE U.S. GOVERNMENT FUND
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 U.S.
GOVERNMENT FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
All investments of the Short-Intermediate U.S. Government 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 U.S. Government 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 U.S. Government 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 U.S. Government 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 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 U.S. Government 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 U.S. Government 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 U.S. Government 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 U.S. Government 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 U.S. Government 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 U.S. Government 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/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.
OTHER POLICIES
There are no restrictions or limitations on investments in obligations of the
U.S. or of corporations chartered by Congress as federal government
instrumentalities. The underlying assets of the Fund may be retained in cash,
including cash equivalents, which are Treasury bills, commercial paper, and
short-term bank obligations such as CDs, bankers' acceptances, and repurchase
agreements. It is intended, however, that only so much of the underlying
assets of the Fund be retained in cash as is deemed desirable or expedient
under then-existing market conditions.
U.S. GOVERNMENT SECURITIES. As indicated in the Prospectus, the Fund 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 Fund may invest, since it is not
obligated to do so. These agencies and instrumentalities are supported by
either the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury, the discretionary authority of the U.S.
government to purchase certain obligations of an agency or instrumentality,
or the credit of the agency or instrumentality.
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.
ILLIQUID SECURITIES AND RESTRICTED SECURITIES. The Fund may invest up to 10%
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, over-the-counter options and the assets used to cover such options,
and other securities which are not readily marketable. Investments in savings
deposits are generally considered illiquid and will, together with other
illiquid investments, not exceed 10% of the Fund's total net assets.
Notwithstanding this limitation, the Board has authorized the Fund to invest
in securities that cannot be offered to the public for sale without first
being registered under the Securities Act of 1933, as amended (the "1933
Act") ("restricted securities"), where such investment is consistent with the
Fund's investment objective and has authorized such securities to be
considered liquid to the extent Advisers determines that there is a liquid
institutional or other market for such securities. For example, restricted
securities that may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the 1933 Act and for which a liquid
institutional market has developed will be considered liquid even though such
securities have not been registered pursuant to the 1933 Act.
The Board will review any determination by Advisers to treat a restricted
security as a liquid security on an ongoing basis, including Advisers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, Advisers and the Board will take into account
the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (iii) dealer undertakings to
make a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer). To
the extent the Fund invests in restricted securities that are deemed liquid,
the general level of illiquidity in the Fund may be increased if qualified
institutional buyers become uninterested in purchasing these securities or
the market for these securities contracts. The Short-Intermediate U.S.
Government Fund has not purchased and does not intend currently to purchase
illiquid or restricted securities.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
FOREIGN SECURITIES. As stated in the Prospectus, investments in foreign
securities present special risks and considerations not typically associated
with investments in securities issued by U.S. issuers. Such risks include
reductions of income as a result of foreign taxes; fluctuation in value of
foreign portfolio investments due to changes in currency rates and control
regulations (e.g., currency blockage); transaction charges for currency
exchange; lack of information about foreign governments; greater difficulty
in commencing lawsuits; increased risk of delays in settlement of portfolio
transactions or loss of certificates because of the lesser speed and
reliability of mail service; and differences (which may be favorable or
unfavorable) between the U.S. economy and foreign economies.
OPTIONS ON U.S. AND FOREIGN SECURITIES. The writing of covered put options is
similar in terms of risk/return characteristics to buy-and-write
transactions. If the market price of the underlying security rises or
otherwise is above the exercise price, the put option will expire worthless
and the Global Government Income 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 Government Income 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 Global Government Income
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 Government Income 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.
In addition to the matters discussed in the Prospectus, you should be aware
that when trading options on foreign exchanges or in the over-the-counter
market, many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, the Global Government Income 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 Global Government Income
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 Government Income Fund's option trading activities,
it intends to comply with the California Corporate Securities Rules as they
pertain to prohibited investments.
The Global Government Income 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 Government Income Fund believes that the use of futures contracts will
benefit the Fund, if Advisers' investment judgment about the general
direction of interest or currency exchange rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if the Global Government Income 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 Government Income 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 Government Income 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
Government Income 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 Government Income
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 Government
Income Fund will purchase a put option on a futures contract only to hedge
the Fund's portfolio against the risk of rising interest rates or the decline
in the value of securities denominated in a foreign currency.
ADDITIONAL RISKS OF FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, AND
OPTIONS ON FUTURES CONTRACTS. Forward contracts are not traded on contract
markets regulated by the CFTC or by the SEC. The ability of the Global
Government Income 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 Government Income Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of exercise and settlement terms and procedures,
and margin requirements different from those in the U.S., and (v) lesser
trading volume.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the Fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the Fund or
(ii) 67% or more of the shares of the Fund present at a shareholder meeting
if more than 50% of the outstanding shares of the Fund are represented at the
meeting in person or by proxy, whichever is less.
The Global Government Income Fund MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that it may borrow from banks, for temporary or emergency purposes, up to 30%
of its total assets and pledge up to 30% of its total assets in connection
therewith. (No new investments will be made by the Fund while any outstanding
borrowings exceed 5% of its total assets.)
2. Buy any securities on "margin," except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities and except that the Fund may make margin deposits in
connection with futures contracts and options on futures contracts.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
portfolio securities of the Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a
result, the aggregate of such loans exceeds 30% of the value of the Fund's
total assets (taken at market value) at the time of the most recent loan.
Also, entry into repurchase agreements is not considered a loan for purposes
of this restriction.
4. Act as underwriter of securities issued by other persons except insofar
as the Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Invest more than 25% of its assets in the securities of issuers in any
one industry, other than foreign governments.
6. Purchase from or sell any portfolio securities to its officers and
trustees, or any firm of which any officer or trustee is a member, as
principal, except that the Fund may deal with such persons or firms as
brokers and pay a customary brokerage commission; retain securities of any
issuer, if to the knowledge of the Fund, one or more of its officers,
trustees or the investment manager own beneficially more than one-half of 1%
of the securities of such issuer and all such persons together own
beneficially more than 5% of such securities.
7. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the
operation of a predecessor.
8. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
9. Invest in interests in oil, gas or other mineral exploration or
development programs.
10. Invest in companies for the purpose of exercising control or management.
11. Purchase securities of other investment companies.
12. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures contracts, forward contracts or repurchase transactions.
13. Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issuer as, and equal in
amount to, the securities sold short ("short sales against the box"), and
unless not more than 10% of the Fund's net assets (taken at market value) is
held as collateral for such sales at any one time.
(Restrictions No. 7, 11, and 12 are not fundamental policies of the Global
Government Income Fund and may be changed by the trustees without shareholder
approval.)
The Short-Intermediate U.S. Government 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 that 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 Government Income 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 owned by the Global Government Income Fund, the Fund may receive
stock, real estate, or other investments that the Fund would not, or could
not, buy. In this case, the Global Government Income Fund intends 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.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Trust who are responsible for
administering the Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE
YEARS
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 28 of the investment companies in
the Franklin Templeton Group of Funds.
Harris J. Ashton (65)
191 Clapboard Ridge
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 52 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 (65)
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 54 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director (1993-present) of Amerada Hess Corporation and Hercules
Incorporated; Director of Beverly Enterprises, Inc. (1995-present) and H.J.
Heinz Company (1994-present); formerly, chairman (1995-1997) and trustee
(1993-1997) of 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); and trustee or
director of 24 of the investment companies in the Franklin Templeton Group of
Funds.
*Edward B. Jamieson (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of five of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (65)
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 53 of the investment companies in the Franklin
Templeton Group of Funds; and formerly, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (57)
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
56 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68)
20833 Stevens Creek Blvd. Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (69)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of Funds; FORMERLY
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.
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 56 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (37)
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.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
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.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 56 of the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41)
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.; President, Chief Executive Officer, Chief
Investment Officer and Director, Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are currently
paid $925 per month plus $925 per meeting attended. As shown above, the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table
provides the total fees paid to nonaffiliated Board members by the Trust and
by other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES THE FRANKLIN
RECEIVED RECEIVED FROM THE TEMPLETON GROUP OF
FROM THE FRANKLIN TEMPLETON FUNDS ON WHICH EACH
NAME TRUST*** GROUP OF FUNDS**** SERVES*****
- ---- -------- -----------
Frank H. Abbott, III $21,275 $165,937 28
Harris J. Ashton 21,275 344,642 52
S. Joseph Fortunato 21,275 361,562 54
David W. Garbellano* 16,650 91,317 N/A
Edith Holiday** 0 72,875 24
Frank W.T. LaHaye 20,350 141,433 27
Gordon S. Macklin 21,275 337,292 51
*Deceased, September 27, 1997.
**Elected to the Board, January 15, 1998.
***For the fiscal year ended October 31, 1997.
****For the calendar year ended December 31, 1997.
*****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 57 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director 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 Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of February 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 254
shares of the Global Government Income Fund - Class I, and 198 shares of
Short-Intermediate U.S. Government Fund - Class I, or less than 1% of the
total outstanding shares of each Fund's Class I shares. Many of the Board
members also own shares in other funds in the Franklin Templeton Group of
Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the
Fund's investment activities. Advisers and its officers, directors and
employees are covered by fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the Fund.
Similarly, with respect to the Fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the Fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the Fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
Under an agreement with Advisers, Investment Counsel is the Global Government
Income Fund's sub-advisor. Investment Counsel provides Advisers with
investment management advice and assistance. Under the sub-advisory
agreement, the sub-advisor provides, subject to Advisers' discretion, a
portion of the investment advisory services for which Advisers is responsible
pursuant to the management agreement. These responsibilities may include
managing a portion of the Global Government Income Fund's investments and
supplying research services. Research services provided by the sub-advisor
may include information, analytical reports, computer screening studies,
statistical data, and factual resumes pertaining to securities throughout the
world. This supplemental research, when utilized, is subject to analysis by
Advisers before being incorporated into the investment advisory process. The
sub-advisory agreement provides that the sub-advisor may also select brokers
and dealers for execution of the Global Government Income Fund's portfolio
transactions consistent with the Fund's brokerage policies.
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% of net assets of the
Fund up to and including $100 million; 1/24 of 1% of net assets of the Fund
in excess of $100 million up to $250 million; and 9/240 of 1% of net assets
of the Fund in excess of $250 million. The fee is computed at the close of
business on the last business day of each month. Each class of the Fund's
shares pays its proportionate share of the management fee. Under the
sub-advisory agreement, Advisers pays Investment Counsel a sub-advisory fee,
in U.S. dollars, equal to an annual rate of 0.35% of the Global Government
Income Fund's net assets up to and including $100 million; 0.25% of net
assets over $100 million up to and including $250 million; and 0.20% of net
assets over $250 million. This fee is not a separate expense of the Global
Government Income Fund but is paid by Advisers from the management fees it
receives from the Global Government Income Fund.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Global
Government Income Fund paid management fees totaling $984,273, $866,730, and
$785,629, respectively, to Advisers. For the same periods, the
Short-Intermediate U.S. Government Fund paid management fees totaling
$1,187,800, $1,142,250, and $1,076,296, respectively, to Advisers. For the
same periods, Advisers paid Investment Counsel sub-advisory fees of $526,072,
$438,179 and $428,496, respectively.
MANAGEMENT AGREEMENTS. The management and sub-advisory agreements are in
effect until February 28, 1999. They may continue in effect for successive
annual periods if their continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of
the Fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to either agreement or
interested persons of any such party (other than as members of the Board),
cast in person at a meeting called for that purpose. The management agreement
may be terminated without penalty at any time by the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities on 30
days' written notice to Advisers, or by Advisers on 30 days' written notice
to the Fund, and will automatically terminate in the event of its assignment,
as defined in the 1940 Act. The sub-advisory agreement may be terminated
without penalty at any time by the Board or by vote of the holders of a
majority of the Fund's outstanding voting securities, or by either Advisers
or Investment Counsel on not less than 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the Fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. The fee is paid by Advisers. It is not a separate expense of the
Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. 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, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, are the Fund's independent auditors. During the fiscal year
ended October 31, 1997, their auditing services consisted of rendering an
opinion on the financial statements of the Trust included in the Trust's
Annual Report to Shareholders for the fiscal year ended October 31, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Since most purchases by the Fund are principal transactions at net prices,
the Fund incurs little or no brokerage costs. The Fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. The Fund seeks
to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and
statistical information, as well as for special services provided by the
dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the Fund's officers are satisfied that the best execution is obtained, the
sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the Fund, any portfolio securities tendered by the Fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to Advisers will be reduced by the amount of
any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that
the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Fund.
During the fiscal years ended October 31, 1995, 1996 and 1997, the Fund paid
no brokerage commissions.
As of October 31, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities laws of states where the Fund
offers its shares may differ from federal law. Banks and financial
institutions that sell shares of the Fund may be required by state law to
register as Securities Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the Fund, we may impose a $10 charge against your account for each
returned item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates
provide financial support to various Securities Dealers that sell shares of
the Franklin Templeton Group of Funds. This support is based primarily on the
amount of sales of fund shares. The amount of support may be affected by:
total sales; net sales; levels of redemptions; the proportion of a Securities
Dealer's sales and marketing efforts in the Franklin Templeton Group of
Funds; a Securities Dealer's support of, and participation in, Distributors'
marketing programs; a Securities Dealer's compensation programs for its
registered representatives; and the extent of a Securities Dealer's marketing
programs relating to the Franklin Templeton Group of Funds. Financial support
to Securities Dealers may be made by payments from Distributors' resources,
from Distributors' retention of underwriting concessions and, in the case of
funds that have Rule 12b-1 plans, from payments to Distributors under such
plans. In addition, certain Securities Dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
NASD's rules.
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, however, those who have shown an interest in the
Franklin Templeton Funds are more likely to be considered. To the extent
permitted by their firm's policies and procedures, a registered
representative's expenses in attending these meetings may be covered by
Distributors.
REINVESTMENT DATE. Global Government Income Fund shares acquired through the
reinvestment of dividends will be purchased at the Net Asset Value determined
on the business day following the dividend record date (sometimes known as
the "ex-dividend date"). The processing date for the reinvestment of
dividends may vary and does not affect the amount or value of the shares
acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your Global Government
Income Fund account, declared but unpaid income dividends and capital gain
distributions will be exchanged into the new fund and will be invested at Net
Asset Value. If you request the exchange of the total value of your
Short-Intermediate U.S. Government Fund account, accrued but unpaid income
dividends and capital gain distributions will be reinvested in the Fund at
the Net Asset Value on the date of the exchange, and then the entire share
balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the Fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the Fund's
investment objective exist immediately. This money will then be withdrawn
from the short-term, money market instruments and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the fifth business day following the sale. The funds you
are seeking to exchange into may delay issuing shares pursuant to an exchange
until that fifth business day. The sale of Fund shares to complete an
exchange will be effected at Net Asset Value at the close of business on the
day the request for exchange is received in proper form. Please see "May I
Exchange Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
Fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the Fund receives notification
of the shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the Fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the Fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the Fund's net assets and you may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the Fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the Fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the Fund may reimburse
Investor Services an amount not to exceed the per account fee that the Fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the Fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at
their market price as determined above. The current market value of any
option held by the Global Government Income Fund is its last sale price on
the relevant exchange before the time when assets are valued. Lacking any
sales that day or if the last sale price is outside the bid and ask prices,
options are valued within the range of the current closing bid and ask prices
if the valuation is believed to fairly reflect the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the Net Asset Value is not calculated. Thus, the
calculation of the Net Asset Value does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in
the calculation and, if events materially affecting the values of these
foreign securities occur, the securities will be valued at fair value as
determined by management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the Net Asset Value is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected in
the computation of the Net Asset Value. If events materially affecting the
values of these securities occur during this period, the securities will be
valued at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the Fund may utilize a pricing service, bank or Securities Dealer
to perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of dividends, interest, original issue, market, and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitutes its 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 derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the Fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the Fund. Any net short-term or long-term capital gains
realized by the Fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required
to report the capital gain distributions paid to you from gains realized on
the sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997, that were held for more than one year but not more than 18 months,
and securities sold by the Fund before May 7, 1997, that were held for more
than one year. These gains will be taxable to individual investors at a
maximum rate of 28%.
"20% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997, that were held for more than 18 months, and under a transitional
rule, securities sold by the Fund between May 7 and July 28, 1997 (inclusive),
that were held for more than one year. These gains will be taxable to
individual investors at a maximum rate of 20% for individual investors in the
28% or higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of
18% for individuals in the 28% or higher federal income tax brackets and 8%
for individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than 5 years which are sold after December
31, 2000. For individuals who are subject to tax at higher rates, qualified
5-year gains are net gains on securities which are purchased after December
31, 2000, and are held for more than 5 years. Taxpayers subject to tax at
the higher rates may also make an election for shares held on January 1,
2001, to recognize gain on their shares in order to qualify such shares as
qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to
include 1997 Act tax law changes, and may be obtained by calling Fund
Information. You should consult your personal tax advisor regarding any
questions about your personal tax reporting.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November, or December and paid to you in January of the following
year will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The Fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. The Global Government Income
Fund is authorized to invest in foreign currency denominated securities.
Most foreign exchange gains realized on the sale of debt instruments are
treated as ordinary income by the Fund. Similarly, foreign exchange losses
realized by the Fund on the sale of debt instruments 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.
If more than 50% of the value of the Fund's assets consist of foreign
securities, the Fund may elect to pass-through to you the amount of foreign
taxes it paid. If the Fund makes this election, your year-end statement will
show more taxable income than was actually distributed to you. However, you
will be entitled either to deduct your share of such taxes in computing your
taxable income or to claim a foreign tax credit.
The 1997 Act simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by the Fund. These provisions will
allow investors who claim a credit for foreign taxes paid of $300 or less on
a single return or $600 or less on a joint return during any year (all of
which must be reported on IRS Form 1099-DIV from the Fund to the investor) to
bypass the burdensome and detailed reporting requirements on the supporting
foreign tax credit schedule (Form 1116) and report foreign taxes paid
directly on page 2 of Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED
PROCEDURE WILL NOT BE AVAILABLE UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed 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.
TAXES
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
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. 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 you. 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 available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, the
Fund must meet certain specific requirements, including:
o The Fund must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Fund's
total assets, and, with respect to 50% of the Fund's total assets, no
investment (other than cash and cash items, U.S. government securities
and securities of other regulated investment companies) can exceed 5%
of the Fund's total assets;
o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in such
stock, securities, or currencies; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal
years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The Fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and 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. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. 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 for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange.
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. See
"Additional Information on Distributions and Taxes - Distributions" for a
description of the holding periods and categories of capital gain that apply
under the 1997 Act.
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 purchase 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. All or a portion of the sales charge that you paid for
your shares in the Fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in such Fund or in another fund in the Franklin Templeton Funds, and the
sales charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold 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 GNMA 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. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You
should consult with your own tax advisor to determine the application of your
state and local laws to these distributions. Because the rules on exclusion
of this income are different for corporations, corporate shareholders should
consult with their corporate tax advisors about whether any of their
distributions may be exempt from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. It is anticipated that no
portion of the Fund's distributions will qualify for the corporate
dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES. The Global Government Income Fund is
authorized to invest in derivative securities. The Fund's investment in
options, futures contracts, and forward contracts, including transactions
involving actual or deemed short sales or foreign exchange gains or losses,
are subject to many complex and special tax rules. Over-the-counter options
on debt securities and equity options, including options on stock and on
narrow-based stock indexes, will be subject to tax under section 1234 of the
Code, generally producing a long-term or short-term capital gain or loss upon
exercise, lapse, or closing out of the option or sale of the underlying stock
or security. Certain other options, futures, and forward contracts entered
into by the Fund are generally governed by section 1256 of the Code. These
"section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options
on futures contracts, regulated futures contracts, and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held
by the Fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of such Fund's fiscal year (and
on other dates as prescribed by the Code), and all gain or loss associated
with fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by section 988 of the Code)
will generally be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. Under legislation pending in technical
corrections to the 1997 Act, the 60% long-term capital gain portion will
qualify as 20% rate gain and will be subject to tax to individual investors
at a maximum rate of 20% for investors in the 28% or higher federal income
tax brackets, or at a maximum rate of 10% for investors in the 15% federal
income tax bracket. While foreign currency is marked-to-market at year end,
gain or loss realized as a result will always be ordinary. Even though
marked-to-market, gains and losses realized on foreign currency and foreign
security investments will generally be treated as ordinary income. The
effect of section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on section 1256 positions
may require the Fund to accrue taxable income without the corresponding
receipt of cash. In order to generate cash to satisfy the distribution
requirements of the Code, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash
flows from other sources, such as the sale of Fund shares. In these ways,
any or all of these rules may affect the amount, character and timing of
income distributed to you by the Fund.
When the Fund holds an option or contract which substantially diminishes such
Fund's risk of loss with respect to another position of such Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods, and conversion of short-term
capital losses into long-term capital losses. The Fund may make certain tax
elections for mixed straddles (i.e., straddles comprised of at least one
section 1256 position and at least one non-section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules,
the Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest, or certain
debt instruments. The Fund will generally be treated as making a
constructive sale when it: 1) enters into a short sale on the same property,
2) enters into an offsetting notional principal contract, or 3) enters into a
futures or forward contract to deliver the same or substantially similar
property. Other transactions (including certain financial instruments called
collars) will be treated as constructive sales as provided in Treasury
regulations to be published. There are also certain exceptions that apply
for transactions that are closed before the end of the 30th day after the
close of the taxable year.
Distributions paid to you by the Fund of ordinary income and short-term
capital gains arising from such Fund's investments, including investments in
options, forwards, and futures contracts, will be taxable to you as ordinary
income. The Fund will monitor its transactions in such options and contracts
and may make certain other tax elections in order to mitigate the effect of
the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Global
Government Income Fund is authorized to invest in foreign currency
denominated securities. Under the Code, gains or losses attributable to
fluctuations in foreign currency exchange rates which occur between the time
the Fund accrues income (including dividends), or accrues expenses which are
denominated in a foreign currency, and the time the Fund actually collects
such income or pays such expenses generally are treated as ordinary income or
loss. Similarly, on the disposition of debt securities denominated in a
foreign currency and on the disposition of certain options, futures, and
forward contracts, gain or loss attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract
and the date of its disposition are also treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "section 988" gains or
losses, may increase or decrease the amount of the Fund's net investment
company taxable income, which, in turn, will affect the amount of income to
be distributed to you by the Fund.
If the Fund's section 988 losses exceed the Fund's other net investment
company taxable income during a taxable year, the Fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your Fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your Fund shares will be treated as
capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The Global
Government Income Fund may invest in shares of foreign corporation which may
be classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC if at
least one-half of its assets constitute investment-type assets or 75% or more
of its gross income is investment-type income.
If the Fund receives an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the
Fund to you. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the Fund
held the PFIC shares. The Fund itself will be subject to tax on the portion,
if any, of an excess distribution that is so allocated to prior Fund taxable
years, and an interest factor will be added to the tax, as if the tax had
been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
Fund. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital
gain. This may have the effect of increasing Fund distributions to you that
are treated as ordinary dividends rather than long-term capital gain
dividends.
The Global Government Income Fund may be eligible to elect alternative tax
treatment with respect to PFIC shares. Under an election that currently is
available in some circumstances, the Fund generally would be required to
include in its gross income its share of the earnings of a PFIC on a current
basis, regardless of whether distributions are received form the PFIC during
such period. If this election were made, the special rules, discussed above,
relating to the taxation of excess distributions would not apply. In
addition, the 1997 Act provides for another election that would involve
marking-to-market the Fund's PFIC shares at the end of each taxable year (and
on certain other dates as prescribed in the Code), with the result that
unrealized gains would be treated as though the were realized. The Fund would
also be allowed an ordinary deduction for the excess, if any, of the adjusted
basis of its investment in the PFIC stock over its fair market value at the
end of the taxable year. This deduction would be limited to the amount of any
net mark-to-market gains previously included with respect to that particular
PFIC security. If the Fund were to make this second PFIC election, tax at the
Fund level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount
of tax payable by the Fund (if any), the amounts distributable to you by the
Fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is
a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the Fund acquires shares in that corporation. While
the Fund will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so
and it reserves the right to make such investments as a matter of its
fundamental investment policy.
CONVERSION TRANSACTIONS. Gains realized by the Fund from transactions that
are deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to
the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Fund's expected return is
attributable to the time value of such Fund's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
section 263(g) of the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. The Global Government Income Fund is authorized to
invest in preferred and preference stock. Occasionally, the Fund may
purchase "stripped preferred stock" that is subject to special tax
treatment. Stripped preferred stock is defined as certain preferred stock
issues where ownership of the stock has been separated from the right to
receive dividends that have not yet become payable. The stock must have a
fixed redemption price, must not participate substantially in the growth of
the issuer, and must be limited and preferred as to dividends. The
difference between the redemption price and purchase price is taken into Fund
income over the term of the instrument as if it were original issue
discount. The amount that must be included in each period generally depends
on the original yield to maturity, adjusted for any prepayments of
principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. The
Fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed-interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the Fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed-interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The Fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the Fund level. PIK bonds are
subject to similar tax rules concerning the amount, character, and timing of
income required to be accrued by the Fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the Fund may elect to accrue market
discount on a current basis, in which case such Fund will be required to
distribute any such accrued discount. If the Fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
Fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized
performance quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over 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 front-end sales charge currently in effect.
The average annual total return for Advisor Class for the indicated periods
ended October 31, 1997, was as follows:
INCEPTION ONE FIVE TEN FROM
FUND NAME DATE YEAR YEAR YEAR INCEPTION
- --------------------------------------------------------------------------------
Global Government
Income Fund 3/15/88 4.63% 6.69% N/A 7.12%
Short-Intermediate
U.S. Government Fund 4/15/87 5.92% 5.30% 7.02% 6.99%
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 return for Advisor Class for
the indicated periods ended October 31, 1997, was as follows:
INCEPTION ONE FIVE TEN FROM
FUND NAME DATE YEAR YEAR YEAR INCEPTION
- --------------------------------------------------------------------------------
Global Government
Income Fund 3/15/88 4.63% 44.39% N/A 103.78%
Short-Intermediate
U.S. Government Fund 4/15/87 5.92% 29.46% 97.13% 103.87%
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the 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 during the base period. The
yield for Advisor Class for the 30-day period ended October 31, 1997, was
5.53% for the Global Government Income Fund and 5.17% for the
Short-Intermediate U.S. Government Fund.
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 of the Fund. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share during a certain period
and dividing that amount by the current 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 (in the case of the
Global Government Income Fund) and short-term capital gains, and is
calculated over a different period of time. The current distribution rate for
Advisor Class for the 30-day period ended October 31, 1997, was 7.23% for the
Global Government Income Fund and 5.70% for the Short-Intermediate U.S.
Government Fund.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of the fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of the Fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The Fund may include in its advertising or sales material information
relating to investment objectives and performance results of funds belonging
to the Franklin Templeton Group of Funds. Resources is the parent company of
the advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment
of dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) Lipper- Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
d) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
e) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
f) Financial publications: The WALL STREET JOURNAL and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
g) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
h) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
i) Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
j) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
k) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
l) Standard & Poor's Bond Indices - measures yield and price of corporate,
municipal and government bonds.
m) Other taxable investments, including CD's, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, and
repurchase agreements.
n) 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 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.
p) IBC's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free and government money funds.
q) 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.
r) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the Fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can
be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the Fund to calculate its figures. In
addition, there can be no assurance that the Fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years
and now services more than 2.9 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 $221 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
120 U.S. based open-end investment companies to the public. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.
The Short-Intermediate U.S. Government Fund is eligible for investment by the
National Marine Fisheries Service Capital Construction Funds.
As of February 2, 1998, the principal shareholders of the Fund, beneficial or
of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
GLOBAL GOVERNMENT INCOME FUND - ADVISOR CLASS
FTTC TTEE for ValuSelect
Franklin Templeton
P.O. Box 2438
Rancho Cordova, CA 95741-2438 74,405.354 84.02%
SHORT-INTERMEDIATE U.S. GOVERNMENT FUND - ADVISOR CLASS
Elwood H. Weilage &
Dorothy C. Weilage &
Henry H. Weilage JT TEN
4615 Holly Drive
Palm Beach Gardens, FL 33418 5,855.477 5.86%
Templeton Funds Trust Co.
700 Central Ave.
Saint Petersburg, FL 33701-3628 62,775.200 62.79%
From time to time, the number of Fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Fund's Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of the Fund's assets if you are held personally liable for
obligations of the Fund. The Declaration of Trust provides that the Fund
shall, upon request, assume the defense of any claim made against you for any
act or obligation of the Fund and satisfy any judgment thereon. All such
rights are limited to the assets of the Fund. The Declaration of Trust
further provides that the Fund may maintain appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the
protection of the Fund, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the
activities of the Fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
Fund's total assets. Thus, the risk of you incurring financial loss on
account of shareholder liability is limited to the unlikely circumstances in
which both inadequate insurance exists and the Fund itself is unable to meet
its obligations.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the Fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
Summary of Code of Ethics. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended October 31, 1997,
including the auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Global Government Income Fund
offers three classes of shares, designated "Class I," "Class II," and
"Advisor Class." The Short-Intermediate U.S. Government Fund offers two
classes of shares, designated "Class I" and "Advisor Class." The classes have
proportionate interests in the Fund's portfolio. They differ, however,
primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the Fund's
sub-advisor
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities
Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
PROSPECTUS - The prospectus for Advisor Class shares of the Fund dated March
1, 1998, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the Fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be 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. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
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.
FRANKLIN INVESTORS SECURITIES TRUST
File Nos. 33-11444 & 811-4986
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
(1) Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated October 31, 1997, as
filed with the SEC electronically on Form Type N-30D on January 9, 1998
Franklin Investors Securities Trust
(i) Financial Highlights
(ii) Statement of Investments - October 31, 1997
(iii) Statements of Assets and Liabilities - October 31, 1997
(iv) Statements of Operations for the year ended October 31, 1997
(v) Statements of Changes in Net Assets for the years ended October
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
Adjustable Rate Securities Portfolios
(i) Financial Highlights
(ii) Statement of Investments - October 31, 1997
(iii) Statements of Assets and Liabilities - October 31, 1997
(iv) Statements of Operations for the year ended October 31, 1997
(v) Statements of Changes in Net Assets for the years ended October
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
b) Exhibits:
The following exhibits are incorporated by reference, except exhibits
1(iv), 8(iii), 8(iv), 11(i), 27(i), 27(ii), 27(iii), 27(iv), 27(v),
27(vi), 27(vii), 27(viii), 27(ix), 27(x) and 27(xi) which are attached
herewith:
(1) Copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated December 16, 1986
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form 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
(2) Copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form 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
(3) Copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(4) Specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
Not Applicable
(5) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement 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 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 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., and
Templeton Investment Counsel, Inc., providing for service
to Franklin Investors Securities Trust on behalf of
Franklin Global Government Income Fund 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 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
(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 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
(6) Copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
(i) 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 Agreement between Franklin/Templeton
Distributors, Inc., and securities dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) Copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish
a reasonably detailed description thereof;
Not Applicable
(8) Copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) 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) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
(iv) Amendment dated October 15, 1997 to Exhibit A in the Master
Custody Agreement between Registrant and Bank of New York
dated February 16, 1996
(v) 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
(9) Copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement;
Not Applicable
(10) An opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable;
Not Applicable
(11) Copies of any other opinions, appraisals or rulings and consents
to the use thereof relied on in the preparation of this
Registration Statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Accountants
(12) All financial statements omitted from Item 23;
Not Applicable
(13) Copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
(i) Letter of Understanding relating to Franklin Global
Government 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 the
Registration Statement on Form N-1A
File No. 33-11444 and 811-4986
Filing Date: June 1, 1992
(14) Copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers its
securities, any instructions thereto and any other documents
making up the model plan. Such form(s) should disclose the costs
and fees charged in connection therewith;
(i) Copy of Model Retirement Plan
Registrant: Franklin High Income Trust
Filing: Post-effective amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) Copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
(i) Distribution Plan between Franklin Global Government Income
Fund and Franklin/Templeton Distributors, Inc., 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 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 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 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 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 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 on behalf
of Franklin Global Government Income Fund 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 on behalf
of Franklin Convertible Securities Fund 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 on behalf
of Franklin Equity Income Fund 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
(16) Schedule for computation of each performance quotation provided
in the Registration Statement in response to Item 22 (which need
not be audited).
(i) Schedule for Computation of Performance Quotation
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(17) Power of Attorney
(i) Power of Attorney for Franklin Investors Securities Trust
dated February 16, 1995
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 Secretary for Franklin Investors Securities
Trust dated February 16, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(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
(18) Copies of any plan entered into by registrant pursuant to Rule
18f-3 under the 1940 Act
(i) 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
(ii) 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
(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) Multiple Class Plan for Franklin Equity Income 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
(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
(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
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of November 30, 1997, the number of shareholders of record of
Registrant's shares were as follows:
<TABLE>
<CAPTION>
NUMBER OF RECORD HOLDERS
CLASS I CLASS II ADVISOR CLASS
<S> <C> <C> <C>
Franklin Global Government Income Fund 8,420 455 28
Franklin Short-Intermediate U.S. Government
Securities Fund 7,060 N/A 28
Franklin Convertible Securities Fund 11,222 2,357 N/A
Franklin Adjustable U.S. Government
Securities Fund 17,611 N/A N/A
Franklin Equity Income Fund 21,147 4,002 N/A
Franklin Adjustable Rate Securities Fund 1,062 N/A N/A
</TABLE>
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court 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 28 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 is 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 29 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
Franklin Templeton Japan Fund
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 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 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 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 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 Fund'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 certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and 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 26th day of February, 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: February 26, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: February 26, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 26, 1998
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: February 26, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 26, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 26, 1998
EDITH E. HOLIDAY Trustee
Edith E. Holiday Dated: February 26, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 26, 1998
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: February 26, 1998
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: February 26, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 26, 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 26th day of February, 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: February 26, 1998
MARTIN L. FLANAGAN Principal Financial Officer
Martin L. Flanagan Dated: February 26, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 26, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 26, 1998
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: February 26, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 26, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 26, 1998
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: February 26, 1998
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: February 26, 1998
WILLIAM J. LIPPMAN* Trustee
William J. Lippman Dated: February 26, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 26, 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.B1(i) Agreement and Declaration of Trust dated *
December 16, 1986
EX-99.B1(ii) Certificate of Amendment of Agreement and *
Declaration of Trust dated March 21, 1995
EX-99.B1(iii) Certificate of Amendment of Agreement and *
Declaration of Trust dated March 13, 1990
EX-99.B1(iv) Certificate of Amendment of Agreement and Attached
Declaration of Trust dated March 21, 1989
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Amendment to By-Laws dated January 18, *
1994
EX-99.B5(i) Management Agreement between Registrant *
and Franklin Advisers, Inc., dated April
15, 1987
EX-99.B5(ii) Administration Agreement between Franklin *
Adjustable U.S. Government Securities
Fund and Franklin Advisers, Inc., dated
June 3, 1991
EX-99.B5(iii) Administration Agreement between Franklin *
Adjustable Rate Securities Fund and
Franklin Advisers, Inc., dated December
26, 1991
EX-99.B5(iv) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, Inc., dated May 1, 1994
EX-99.B5(v) Amendment to Administration Agreement *
between the Registrant on behalf of
Franklin Adjustable Rate Securities Fund
and Franklin Advisers, Inc., dated August
1, 1995
EX-99.B5(vi) Amendment to Administration Agreement *
between Registrant on behalf of Franklin
Adjustable U.S. Government Securities
Fund and Franklin Advisers, Inc., dated
August 1, 1995
EX-99.B6(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors, Inc.,
dated March 29, 1995
EX-99.B6(ii) Forms of Dealer Agreement between *
Franklin/Templeton Distributors, Inc.,
and securities dealers
EX-99.B8(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.B8(ii) Master Custody Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.B8(iii) Amendment dated May 7, 1997 to Master Attached
Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
EX-99.B8(iv) Amendment dated October 15, 1997 to Attached
Exhibit A in Master Custody Agreement
dated February 16, 1996
EX-99.B8(v) Terminal Link Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.B11(i) Consent of Independent Accountants Attached
EX-99.B13(i) Letter of Understanding dated April 12, *
1995
EX-99.B13(ii) Letter of Understanding relating to *
Franklin Adjustable Rate Securities Fund
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Distribution Plan between Franklin Global *
Government Income Fund and
Franklin/Templeton Distributors, Inc.,
dated May 1, 1994
EX-99.B15(ii) Distribution Plan between Franklin *
Short-Intermediate U.S. Government
Securities Fund and Franklin/Templeton
Distributors, Inc., dated May 1, 1994
EX-99.B15(iii) Distribution Plan between Franklin *
Convertible Securities Fund and
Franklin/Templeton Distributors, Inc.,
dated May 1, 1994
EX-99.B15(iv) Amended and Restated Distribution Plan *
between Franklin Adjustable U.S.
Government Securities Fund and
Franklin/Templeton Distributors, Inc.,
dated July 1, 1993
EX-99.B15(v) Distribution Plan between Franklin Equity *
Income Fund and Franklin/Templeton
Distributors, Inc., dated May 1, 1994
EX-99.B15(vi) Amended and Restated Distribution Plan *
between Franklin Adjustable Rate
Securities Fund and Franklin/Templeton
Distributors, Inc., dated July 1, 1993
EX-99.B15(vii) Class II Distribution Plan pursuant to *
Rule 12b-1 on behalf of Franklin Global
Government Income Fund dated March 30,
1995
EX-99.B15(viii) Class II Distribution Plan pursuant to *
Rule 12b-1 on behalf of Franklin
Convertible Securities Fund dated
September 29, 1995
EX-99.B15(ix) Class II Distribution Plan pursuant to *
Rule 12b-1 on behalf of Franklin Equity
Income Fund dated March 30, 1995
EX-99.B16(i) Schedule for Computation of Performance *
Quotation
EX-99.B17(i) Power of Attorney for Franklin Investors *
Securities Trust dated February 16, 1995
EX-99.B17(ii) Certificate of Secretary for Franklin *
Investors Securities Trust dated February
16, 1995
EX-99.B17(iii) Power of Attorney for Adjustable Rate *
Securities Portfolios dated February 16,
1995
EX-99.B17(iv) Certificate of Secretary for Adjustable *
Rate Securities Portfolios dated February
16, 1995
EX-99.B18(i) Multiple Class Plan for Franklin *
Short-Intermediate U.S. Government
Securities Fund dated June 18, 1996
EX-99.B18(ii) Multiple Class Plan for Franklin Global *
Government Income Fund dated June 18,
1996
EX-99.B18(iii) Multiple Class Plan for Franklin *
Convertible Securities Fund dated August
15, 1995
EX-99.B18(iv) Multiple Class Plan for Franklin Equity *
Income Fund dated August 15, 1995
EX-27.B(i) Financial Data Schedule for Franklin Attached
Global Government Income Fund - Class I
EX-27.B(ii) Financial Data Schedule for Franklin Attached
Global Government Income Fund - Class II
EX-27.B(iii) Financial Data Schedule for Franklin Attached
Global Government - 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 Attached
Adjustable U.S. Government Securities Fund
EX-27.B(ix) Financial Data Schedule for Franklin Attached
Equity Income Fund - Class I
EX-27.B(x) Financial Data Schedule for Franklin Attached
Equity Income Fund - Class II
EX-27.B(xi) Financial Data Schedule for Franklin Attached
Adjustable Rate Securities Fund
*Incorporated by Reference
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
FRANLIN INVESTORS SECURITIES TRUST
The undersigned certify that:
1. They constitute a majority of the Trustees of FRANKLIN
INVESTORS SECURITIES TRUST, a Massachusetts business trust (the "Trust").
2. They hereby adopt the following amendment to the Agreement
and Declaration of Trust of the Trust, which deletes in its entirety the
Section of the agreement and Declaration of Trust entitled "SECTION 1.
DIVISION OF BENEFICIAL INTEREST." of Article III and replaces such Section of
Article III with the following:
"SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial
interest in the Trust shall at all times be divided into an
unlimited number of Shares, With a par value of $.01 per Share.
The Trustees may authorize the division of the Shares into
separate Series and the division of Series into separate classes
or sub-series of Shares (subject to any applicable rule,
regulation or order of the Commission or other applicable law or
regulation). The different Series and classes shall be
established and designated and shall have such preference,
conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, terms and conditions
of redemption and other characteristics as they Trustees may
determine.
Notwithstanding the provisions of Section 6(d) of this Article
III or any other provision of this Agreement and Declaration of
Trust, if any matter submitted to shareholders for a vote affects
only the interests of one class of a Series then only such
affected class hall be entitled to vote on the matter. Each Share
of a Series shall have equal rights with each other Share of that
Series with respect to the assets of the Trust pertaining to that
Series. Notwithstanding any other provision of this Agreement and
Declaration of Trust, the dividends payable to the holders of any
Series (or class) (subject to any applicable rule, regulation or
order of the Commission or any other applicable law or
regulation) shall be determined by the Trustees and need not be
individually declared, but may be declared and paid in accordance
with a formula adopted by the Trustees. Except as otherwise
provided herein, all references in this Agreement and Declaration
of Trust to Shares or Series of Shares shall apply without
discrimination to the Shares of each Series.
Shareholders shall have no preemptive or other right to subscribe
to any additional Shares or other securities issued by the Trust
or any Series or class. The Trustees may from time to time divide
or combine the Shares of any particular Series or class into a
greater or lesser number of Shares of that Series or class
without thereby changing the proportionate beneficial interest of
the Shares of that Series or class in the assets belonging to
that Series or class or in any way affecting the rights of Shares
of any other Series or class."
3. It is the determination of the Trustees that approval of
the shareholders of the Trust is not required by the Investment Company Act
of 1940, as amended, or other applicable law. This Amendment is made pursuant
to Article III, Section 5 of this Agreement and Declaration of Trust which
empowers the Trustees to change provisions relating to Shares of the Trust.
We declare under penalty of perjury that the matters set forth in
this certificate are true and correct or our own knowledge.
Dated March 21, 1995
/s/ Frank H. Abbott, III /s/ David W. Garbellano
Frank H. Abbott, III David W. Garbellano
/s/ Harris J. Ashton /s/ Charles B. Johnson
Harris J. Ashton Charles B. Johnson
/s/ S. Joseph Fortunato /s/ Rupert H. Johnson, Jr.
S. Joseph Fortunato Rupert H. Johnson, Jr.
/s/ Frank W.T. LaHaye /s/ Gordon S. Macklin
Frank W.T. LaHaye Gordon S. Macklin
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as
modified hereby, the Agreement is confirmed in all respects. Capitalized
terms used herein without definition shall have the meanings ascribed to them
in the Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as
follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon 3 business days prior written notice from a Fund that
it will invest in any security issued by a Russian issuer ("Russian
Security"), the Custodian shall to the extent required and in accordance with
the terms of the Subcustodian Agreement between the Custodian and Credit
Suisse ("Foreign Custodian") dated as of August 8, 1996 (the "Subcustodian
Agreement") direct the Foreign Custodian to enter into a contract ("Registrar
Contract") with the entity providing share registration services to the
Russian issuer ("Registrar") containing substantially the following
protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract
must establish the Foreign Custodian's right to conduct regular share
confirmations on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be
obligated to effect re-registrations within 72 hours (or such other specified
time as the United States Securities and Exchange Commission (the "SEC") may
deem appropriate by rule, regulation, order or "no-action" letter) of
receiving the necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must
establish the Foreign Custodian's right to hold shares not held directly in
the beneficial owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must
allow the independent auditors of the Custodian and the Custodian's clients
to obtain direct access to the share register for the independent auditors of
each of the Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The
contract must set forth: (1) the Registrar's responsibilities with regard to
corporate actions and
other distributions; (ii) the Registrar's liabilities as established under
the regulations applicable to
the Russian share registration -system and (iii) the procedures for making a
claim against and
receiving compensation from the registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share
confirmations, which shall require the Foreign Custodian to (1) request
either a duplicate share extract or some other sufficient evidence of
verification and (2) determine if the Foreign Custodian's records correlate
with those of the Registrar. For at least the first two years following the
Foreign Custodian's first use of a Registrar in connection with a Fund
investment, and subject to the cooperation of the Registrar, the Foreign
Custodian will conduct these share confirmations on at least a quarterly
basis, although thereafter they may be conducted on a less frequent basis,
but no less frequently than annually, if the Fund's Board of Directors, in
consultation with the Custodian, determine it appropriate.
(c) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Subcustodian to maintain custody of the Fund's share
register extracts or other evidence of verification obtained pursuant to
paragraph (b) above.
(d) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Foreign Custodian to comply with the rules,
regulations, orders and "no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and
delivery of Securities; and
(2) providing notice to the Fund and its Board of
Directors of events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or
inaction of any Registrar or securities depository utilized in connection
with Russian Securities except to the extent that any such action or inaction
was the result of the Custodian's negligence. With respect to any costs,
expenses, damages, liabilities or claims, including attorneys' and
accountants' fees (collectively, "Losses") incurred by a Fund as a result of
the acts or the failure to act by any Foreign Custodian or its subsidiary in
Russia ("Subsidiary"), the Custodian shall take appropriate action to recover
such Losses from the Foreign Custodian or Subsidiary. The Custodian's sole
responsibility and liability to a Fund with respect to any Losses shall be
limited to amounts so received from the Foreign Custodian or Subsidiary
(exclusive of costs and expenses incurred by the Custodian) except to the
extent that such losses were the result of the Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /s/ Stephen E. Grunston
Name: Stephen E. Grunston
Title:Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /s/ Deborah R. Gatzek
Name:Deborah R. Gatzek
Title: Vice President
By: /s/ Karen L. Skidmore
Name: Karen L. Skidmore
Title: Assistant Vice President
Amendment to Master Custody Agreement
The Bank of New York and each of the Investment Companies listed on Exhibit
A, for itself and on behalf of its specified series, hereby amend the Master
Custody Agreement dated as of February 16, 1996, by replacing Exhibit A with
the attached.
Dated as of: October 15, 1997
INVESTMENT COMPANIES
By: /s/ Deborah r. Gatzek
Deborah R. Gatzek
Title: Vice President & Secretary
THE BANK OF NEW YORK
By: /s/ Stephen E. Grunston
Title: Vice President
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian
shall serve under the Master Custody Agreement dated as of February 16, 1996.
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolios Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income
Trust Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Delaware Business Trust
Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income
Trust Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Templeton Fund Allocator Delaware Business Trust Franklin Templeton Conservative Target Fund
Series Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Templeton Pacific Growth Fund
Trust Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin U.S. Government Securities Money
Market Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
Franklin Floating Rate Trust Delaware Business Trust
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
22 to the Registration Statement of Franklin Investors Securities Trust on
Form N-1A (File No. 33-11444) of our reports dated December 5, 1997, 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, 1997.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
February 25, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1997, 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 124,273,516
<INVESTMENTS-AT-VALUE> 121,289,999
<RECEIVABLES> 3,800,915
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,233
<TOTAL-ASSETS> 126,043,883
<PAYABLE-FOR-SECURITIES> 1,231,549
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,249,390
<TOTAL-LIABILITIES> 2,480,939
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129,368,923
<SHARES-COMMON-STOCK> 14,074,297
<SHARES-COMMON-PRIOR> 15,904,735
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (184,646)
<ACCUMULATED-NET-GAINS> (2,971,285)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,650,048)
<NET-ASSETS> 123,562,944
<DIVIDEND-INCOME> 15,206
<INTEREST-INCOME> 10,392,152
<OTHER-INCOME> 0
<EXPENSES-NET> (1,215,945)
<NET-INVESTMENT-INCOME> 9,191,413
<REALIZED-GAINS-CURRENT> (76)
<APPREC-INCREASE-CURRENT> (3,329,899)
<NET-CHANGE-FROM-OPS> 5,861,438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,275,930)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,472,734
<NUMBER-OF-SHARES-REDEEMED> (4,879,312)
<SHARES-REINVESTED> 576,140
<NET-CHANGE-IN-ASSETS> (17,762,756)
<ACCUMULATED-NII-PRIOR> 259,884
<ACCUMULATED-GAINS-PRIOR> (3,035,705)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 785,629
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,215,945
<AVERAGE-NET-ASSETS> 127,728,063
<PER-SHARE-NAV-BEGIN> 8.650
<PER-SHARE-NII> .600
<PER-SHARE-GAIN-APPREC> (.220)
<PER-SHARE-DIVIDEND> (.620)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 8.410
<EXPENSE-RATIO> .900
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1997, ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 052
<NAME> FRANKLIN GLOBAL GOVERNMENT INCOME FUND-CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 124,273,516
<INVESTMENTS-AT-VALUE> 121,289,999
<RECEIVABLES> 3,800,915
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,233
<TOTAL-ASSETS> 126,043,883
<PAYABLE-FOR-SECURITIES> 1,231,549
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,249,390
<TOTAL-LIABILITIES> 2,480,939
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129,368,923
<SHARES-COMMON-STOCK> 531,824
<SHARES-COMMON-PRIOR> 427,618
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (184,646)
<ACCUMULATED-NET-GAINS> (2,971,285)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,650,048)
<NET-ASSETS> 123,562,944
<DIVIDEND-INCOME> 15,206
<INTEREST-INCOME> 10,392,152
<OTHER-INCOME> 0
<EXPENSES-NET> (1,215,945)
<NET-INVESTMENT-INCOME> 9,191,413
<REALIZED-GAINS-CURRENT> (76)
<APPREC-INCREASE-CURRENT> (3,329,899)
<NET-CHANGE-FROM-OPS> 5,861,438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (254,743)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 314,368
<NUMBER-OF-SHARES-REDEEMED> (228,727)
<SHARES-REINVESTED> 18,565
<NET-CHANGE-IN-ASSETS> (17,762,756)
<ACCUMULATED-NII-PRIOR> 259,884
<ACCUMULATED-GAINS-PRIOR> (3,035,705)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 785,629
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,215,945
<AVERAGE-NET-ASSETS> 3,825,495
<PER-SHARE-NAV-BEGIN> 8.650
<PER-SHARE-NII> .550
<PER-SHARE-GAIN-APPREC> (.220)
<PER-SHARE-DIVIDEND> (.570)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 8.410
<EXPENSE-RATIO> 1.460
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1997, ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 053
<NAME> FRANKLIN GLOBAL GOVERNMENT INCOME FUND-ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 124,273,516
<INVESTMENTS-AT-VALUE> 121,289,999
<RECEIVABLES> 3,800,915
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,233
<TOTAL-ASSETS> 126,043,883
<PAYABLE-FOR-SECURITIES> 1,231,549
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,249,390
<TOTAL-LIABILITIES> 2,480,939
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 129,368,923
<SHARES-COMMON-STOCK> 88,115
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (184,646)
<ACCUMULATED-NET-GAINS> (2,971,285)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,650,048)
<NET-ASSETS> 123,562,944
<DIVIDEND-INCOME> 15,206
<INTEREST-INCOME> 10,392,152
<OTHER-INCOME> 0
<EXPENSES-NET> (1,215,945)
<NET-INVESTMENT-INCOME> 9,191,413
<REALIZED-GAINS-CURRENT> (76)
<APPREC-INCREASE-CURRENT> (3,329,899)
<NET-CHANGE-FROM-OPS> 5,861,438
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (40,774)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 102,752
<NUMBER-OF-SHARES-REDEEMED> (19,378)
<SHARES-REINVESTED> 4,741
<NET-CHANGE-IN-ASSETS> (17,762,756)
<ACCUMULATED-NII-PRIOR> 259,884
<ACCUMULATED-GAINS-PRIOR> (3,035,705)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 785,629
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,215,945
<AVERAGE-NET-ASSETS> 663,517
<PER-SHARE-NAV-BEGIN> 8.710
<PER-SHARE-NII> 0.490
<PER-SHARE-GAIN-APPREC> (0.280)
<PER-SHARE-DIVIDEND> (0.510)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 8.410
<EXPENSE-RATIO> 0.820
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 188,126,025
<INVESTMENTS-AT-VALUE> 190,657,534
<RECEIVABLES> 3,738,283
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 194,395,817
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,960,642
<TOTAL-LIABILITIES> 1,960,642
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 195,606,905
<SHARES-COMMON-STOCK> 18,665,327
<SHARES-COMMON-PRIOR> 19,068,446
<ACCUMULATED-NII-CURRENT> 497,544
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,200,783)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,531,509
<NET-ASSETS> 192,435,175
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,986,846
<OTHER-INCOME> 0
<EXPENSES-NET> (1,481,235)
<NET-INVESTMENT-INCOME> 10,505,611
<REALIZED-GAINS-CURRENT> 98,482
<APPREC-INCREASE-CURRENT> 229,386
<NET-CHANGE-FROM-OPS> 10,833,479
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,697,486)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,455,984
<NUMBER-OF-SHARES-REDEEMED> (10,469,896)
<SHARES-REINVESTED> 610,793
<NET-CHANGE-IN-ASSETS> (3,606,621)
<ACCUMULATED-NII-PRIOR> 701,887
<ACCUMULATED-GAINS-PRIOR> (6,299,265)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,076,296
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,481,235
<AVERAGE-NET-ASSETS> 190,806,845
<PER-SHARE-NAV-BEGIN> 10.280
<PER-SHARE-NII> .570
<PER-SHARE-GAIN-APPREC> .020
<PER-SHARE-DIVIDEND> (.580)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.290
<EXPENSE-RATIO> .780
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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. SEC. FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 188,126,025
<INVESTMENTS-AT-VALUE> 190,657,534
<RECEIVABLES> 3,738,283
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 194,395,817
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,960,642
<TOTAL-LIABILITIES> 1,960,642
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 195,606,905
<SHARES-COMMON-STOCK> 37,349
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 497,544
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,200,783)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,531,509
<NET-ASSETS> 192,435,175
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,986,846
<OTHER-INCOME> 0
<EXPENSES-NET> (1,481,235)
<NET-INVESTMENT-INCOME> 10,505,611
<REALIZED-GAINS-CURRENT> 98,482
<APPREC-INCREASE-CURRENT> 229,386
<NET-CHANGE-FROM-OPS> 10,833,479
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,468)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37,960
<NUMBER-OF-SHARES-REDEEMED> (1,004)
<SHARES-REINVESTED> 393
<NET-CHANGE-IN-ASSETS> (3,606,621)
<ACCUMULATED-NII-PRIOR> 701,827
<ACCUMULATED-GAINS-PRIOR> (6,299,265)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,076,296
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,481,235
<AVERAGE-NET-ASSETS> 190,806,845
<PER-SHARE-NAV-BEGIN> 10.240
<PER-SHARE-NII> .470
<PER-SHARE-GAIN-APPREC> .070
<PER-SHARE-DIVIDEND> (.480)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 10.300
<EXPENSE-RATIO> .700
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 227,366,851
<INVESTMENTS-AT-VALUE> 240,393,143
<RECEIVABLES> 7,778,769
<ASSETS-OTHER> 1,199,335
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 249,371,247
<PAYABLE-FOR-SECURITIES> 840,588
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 617,163
<TOTAL-LIABILITIES> 1,457,751
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 215,491,211
<SHARES-COMMON-STOCK> 14,427,760
<SHARES-COMMON-PRIOR> 9,738,551
<ACCUMULATED-NII-CURRENT> 1,287,973
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,108,020
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,026,292
<NET-ASSETS> 247,913,496
<DIVIDEND-INCOME> 3,625,422
<INTEREST-INCOME> 7,253,933
<OTHER-INCOME> 0
<EXPENSES-NET> (2,039,769)
<NET-INVESTMENT-INCOME> 8,839,586
<REALIZED-GAINS-CURRENT> 18,354,800
<APPREC-INCREASE-CURRENT> 9,072,653
<NET-CHANGE-FROM-OPS> 36,267,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,148,153)
<DISTRIBUTIONS-OF-GAINS> (9,004,822)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,074,889
<NUMBER-OF-SHARES-REDEEMED> (3,302,613)
<SHARES-REINVESTED> 916,933
<NET-CHANGE-IN-ASSETS> 106,101,038
<ACCUMULATED-NII-PRIOR> 360,304
<ACCUMULATED-GAINS-PRIOR> 9,615,665
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,075,628
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,039,769
<AVERAGE-NET-ASSETS> 187,204,807
<PER-SHARE-NAV-BEGIN> 13.450
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> 2.150
<PER-SHARE-DIVIDEND> (.600)
<PER-SHARE-DISTRIBUTIONS> (.900)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 14.740
<EXPENSE-RATIO> 1.010
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 227,366,851
<INVESTMENTS-AT-VALUE> 240,393,143
<RECEIVABLES> 7,778,769
<ASSETS-OTHER> 1,199,335
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 249,371,247
<PAYABLE-FOR-SECURITIES> 840,588
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 617,163
<TOTAL-LIABILITIES> 1,457,751
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 215,491,211
<SHARES-COMMON-STOCK> 2,402,672
<SHARES-COMMON-PRIOR> 809,797
<ACCUMULATED-NII-CURRENT> 1,287,973
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,108,020
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,026,292
<NET-ASSETS> 247,913,496
<DIVIDEND-INCOME> 3,625,422
<INTEREST-INCOME> 7,253,933
<OTHER-INCOME> 0
<EXPENSES-NET> (2,039,769)
<NET-INVESTMENT-INCOME> 8,839,586
<REALIZED-GAINS-CURRENT> 18,354,800
<APPREC-INCREASE-CURRENT> 9,072,653
<NET-CHANGE-FROM-OPS> 36,267,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (764,202)
<DISTRIBUTIONS-OF-GAINS> (857,185)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,693,202
<NUMBER-OF-SHARES-REDEEMED> (197,081)
<SHARES-REINVESTED> 96,754
<NET-CHANGE-IN-ASSETS> 106,101,038
<ACCUMULATED-NII-PRIOR> 360,304
<ACCUMULATED-GAINS-PRIOR> 9,615,665
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,075,628
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,039,769
<AVERAGE-NET-ASSETS> 187,204,807
<PER-SHARE-NAV-BEGIN> 13.410
<PER-SHARE-NII> .540
<PER-SHARE-GAIN-APPREC> 2.130
<PER-SHARE-DIVIDEND> (.500)
<PER-SHARE-DISTRIBUTIONS> (.900)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 14.680
<EXPENSE-RATIO> 1.740
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 356,924,519
<INVESTMENTS-AT-VALUE> 336,298,798
<RECEIVABLES> 78,248
<ASSETS-OTHER> 39,075
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 336,416,121
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,425,660
<TOTAL-LIABILITIES> 1,425,660
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 437,628,544
<SHARES-COMMON-STOCK> 35,328,183
<SHARES-COMMON-PRIOR> 42,381,783
<ACCUMULATED-NII-CURRENT> 955,056
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (82,967,418)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (20,625,721)
<NET-ASSETS> 334,990,461
<DIVIDEND-INCOME> 22,969,711
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1,825,830)
<NET-INVESTMENT-INCOME> 21,143,881
<REALIZED-GAINS-CURRENT> (4,382,996)
<APPREC-INCREASE-CURRENT> 8,545,202
<NET-CHANGE-FROM-OPS> 25,306,087
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,946,338)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,504,396
<NUMBER-OF-SHARES-REDEEMED> (27,867,699)
<SHARES-REINVESTED> 1,309,703
<NET-CHANGE-IN-ASSETS> (62,087,923)
<ACCUMULATED-NII-PRIOR> 757,513
<ACCUMULATED-GAINS-PRIOR> (78,584,422)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 363,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,825,830
<AVERAGE-NET-ASSETS> 363,734,650
<PER-SHARE-NAV-BEGIN> 9.370
<PER-SHARE-NII> .550
<PER-SHARE-GAIN-APPREC> .100
<PER-SHARE-DIVIDEND> (.540)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.480
<EXPENSE-RATIO> .750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 330,902,056
<INVESTMENTS-AT-VALUE> 396,774,283
<RECEIVABLES> 2,302,033
<ASSETS-OTHER> 592,793
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 399,669,109
<PAYABLE-FOR-SECURITIES> 878,812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 958,646
<TOTAL-LIABILITIES> 1,837,458
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 314,368,425
<SHARES-COMMON-STOCK> 18,260,314
<SHARES-COMMON-PRIOR> 15,050,554
<ACCUMULATED-NII-CURRENT> 603,756
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16,986,141
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65,873,329
<NET-ASSETS> 397,831,651
<DIVIDEND-INCOME> 14,097,622
<INTEREST-INCOME> 1,172,968
<OTHER-INCOME> 0
<EXPENSES-NET> (3,458,953)
<NET-INVESTMENT-INCOME> 11,811,637
<REALIZED-GAINS-CURRENT> 16,999,297
<APPREC-INCREASE-CURRENT> 41,583,856
<NET-CHANGE-FROM-OPS> 70,394,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,821,047)
<DISTRIBUTIONS-OF-GAINS> (5,098,255)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,936,844
<NUMBER-OF-SHARES-REDEEMED> (4,489,818)
<SHARES-REINVESTED> 762,734
<NET-CHANGE-IN-ASSETS> 132,652,566
<ACCUMULATED-NII-PRIOR> 620,202
<ACCUMULATED-GAINS-PRIOR> 5,349,790
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,783,336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,458,953
<AVERAGE-NET-ASSETS> 333,846,424
<PER-SHARE-NAV-BEGIN> 16.410
<PER-SHARE-NII> .640
<PER-SHARE-GAIN-APPREC> 3.230
<PER-SHARE-DIVIDEND> (.640)
<PER-SHARE-DISTRIBUTIONS> (.330)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 19.310
<EXPENSE-RATIO> .970
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 330,902,056
<INVESTMENTS-AT-VALUE> 396,774,283
<RECEIVABLES> 2,302,033
<ASSETS-OTHER> 592,793
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 399,669,109
<PAYABLE-FOR-SECURITIES> 878,812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 958,646
<TOTAL-LIABILITIES> 1,837,458
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 314,368,425
<SHARES-COMMON-STOCK> 2,350,676
<SHARES-COMMON-PRIOR> 1,112,763
<ACCUMULATED-NII-CURRENT> 603,756
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16,986,141
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65,873,329
<NET-ASSETS> 397,831,651
<DIVIDEND-INCOME> 14,097,622
<INTEREST-INCOME> 1,172,968
<OTHER-INCOME> 0
<EXPENSES-NET> (3,458,953)
<NET-INVESTMENT-INCOME> 11,811,637
<REALIZED-GAINS-CURRENT> 16,999,297
<APPREC-INCREASE-CURRENT> 41,583,856
<NET-CHANGE-FROM-OPS> 70,394,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (874,988)
<DISTRIBUTIONS-OF-GAINS> (396,739)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,537,907
<NUMBER-OF-SHARES-REDEEMED> (364,896)
<SHARES-REINVESTED> 64,902
<NET-CHANGE-IN-ASSETS> 132,652,566
<ACCUMULATED-NII-PRIOR> 620,202
<ACCUMULATED-GAINS-PRIOR> 5,349,790
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,783,336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,458,953
<AVERAGE-NET-ASSETS> 333,846,424
<PER-SHARE-NAV-BEGIN> 16.380
<PER-SHARE-NII> .500
<PER-SHARE-GAIN-APPREC> 3.220
<PER-SHARE-DIVIDEND> (.510)
<PER-SHARE-DISTRIBUTIONS> (.330)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 19.260
<EXPENSE-RATIO> 1.720
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 21,083,576
<INVESTMENTS-AT-VALUE> 21,210,207
<RECEIVABLES> 18,736
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,228,943
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 91,604
<TOTAL-LIABILITIES> 91,604
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,940,953
<SHARES-COMMON-STOCK> 2,122,079
<SHARES-COMMON-PRIOR> 1,591,286
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (930,245)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 126,631
<NET-ASSETS> 21,137,339
<DIVIDEND-INCOME> 1,239,654
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (112,494)
<NET-INVESTMENT-INCOME> 1,127,160
<REALIZED-GAINS-CURRENT> (144,543)
<APPREC-INCREASE-CURRENT> 369,436
<NET-CHANGE-FROM-OPS> 1,352,053
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,127,160)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,515,583
<NUMBER-OF-SHARES-REDEEMED> (2,076,570)
<SHARES-REINVESTED> 91,780
<NET-CHANGE-IN-ASSETS> 5,429,966
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (785,702)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,960
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 112,494
<AVERAGE-NET-ASSETS> 19,982,182
<PER-SHARE-NAV-BEGIN> 9.870
<PER-SHARE-NII> .560
<PER-SHARE-GAIN-APPREC> .090
<PER-SHARE-DIVIDEND> (.560)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 9.960
<EXPENSE-RATIO> .810
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
