As filed with the Securities and Exchange Commission on February 29, 2000.
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. 27 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 29 (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
MURRAY L. SIMPSON, 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, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (Date) pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Adjustable Rate Securities Portfolios (the Master Fund) has executed
this registration statement.
Prospectus
FRANKLIN
INVESTORS
SECURITIES TRUST
INVESTMENT STRATEGY
GROWTH & INCOME
GLOBAL INCOME
INCOME
FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS A & C
FRANKLIN EQUITY INCOME FUND - CLASS A, B & C
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS A & C
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT
SECURITIES FUND - CLASS A
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Franklin Convertible Securities Fund
12 Franklin Equity Income Fund
25 Franklin Global Government Income Fund
35 Franklin Short-Intermediate U.S. Government Securities Fund
43 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
45 Choosing a Share Class
50 Buying Shares
52 Investor Services
55 Selling Shares
57 Account Policies
60 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN CONVERTIBLE
SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to maximize total return, consistent with
reasonable risk, by seeking to optimize capital appreciation and high current
income under varying market conditions.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of its
assets in convertible securities (and common stock received upon conversion
of convertible securities). A convertible security is generally a debt
security or preferred stock that may be converted into common stock. By
investing in convertible securities, the fund seeks the opportunity to
participate in the capital appreciation of underlying stocks, while at the
same time relying on the fixed income aspect of the convertible securities to
provide current income and reduced price volatility, which can limit the risk
of loss in a down equity market.
[Begin callout]
The fund invests primarily in securities convertible into common stock.
[End callout]
A convertible security shares features of both equity and debt securities. An
equity security, or stock, represents a proportionate share of the ownership
of a company; its value is based on the success of the company's business,
any income paid to stockholders, the value of its assets, and general market
conditions. Common stocks and preferred stocks are examples of equity
securities. Debt securities represent the obligation of the issuer to repay a
loan of money to it, and generally pay interest to the holder. Bonds, notes
and debentures are examples of debt securities.
A convertible security generally provides for conversion into a specified
amount of common stock of the same (or a different) issuer within a stated
period of time. Like an equity security, a convertible security offers the
potential for capital appreciation resulting from an increase in the price of
the underlying stock. The value of a convertible security also tends to
increase as the price of the underlying stock goes up, and to decrease as the
price of the underlying stock goes down. Like a debt security, a convertible
security provides a fixed income stream and also tends to increase in value
when interest rates fall and decrease in value when interest rates rise.
Because both market movements and interest rates can influence its value, a
convertible security is not as sensitive to interest rate changes as a
non-convertible debt security, nor is it as sensitive to changes in the share
price of its underlying stock.
Some of the convertible securities in which the fund may invest have been
structured to provide enhanced yield, increased equity exposure, or enhanced
downside protection. These securities typically provide a benefit to the
issuer in exchange for the enhanced features, such as a conversion premium
that is paid by the fund.
The fund has no limitation on the capitalization of the companies in which it
may invest, but generally seeks to make its portfolio representative of the
entire convertible securities market, which favors mid- and
large-capitalization companies. Market capitalization is the total market
value of a company's outstanding stock, with mid-capitalization companies
valued between $1-$8 billion and large-capitalization companies valued at
over $8 billion.
Securities rated in the top four ratings categories by independent rating
organizations such as Standard & Poor's Ratings Group and Moody's Investors
Service, Inc. are considered "investment grade." Convertible securities
generally fall within the lower-rated categories as determined by securities
rating organizations. Therefore, the fund may invest up to 100% of its assets
in securities that are below investment grade, however, the fund will not
invest more than 10% of its assets in securities rated below B or in unrated
securities of comparable quality. Generally, lower rated securities pay
higher yields than more highly rated securities to compensate investors for
the higher risk.
OTHER INVESTMENTS The fund may invest up to 35% of its assets in other
securities, consistent with its goal, such as common or preferred stocks,
non-convertible debt securities or foreign securities. The fund currently
intends to limit its investments in foreign securities to 10% or less of its
assets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economies of countries where the fund invests are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest
substantially less in convertible securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
CREDIT Credit risk is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's price and,
thus, impact fund performance.
[Begin callout]
Because the convertible securities the fund holds fluctuate in price, the
value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Convertible securities tend to be subordinate to other debt securities issued
by the same company. Also, issuers of convertible securities are often not as
strong financially as those issuing securities with higher credit ratings.
These companies are more likely to encounter financial difficulties and are
more vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could affect their ability to make
interest and principal payments. If an issuer stops making interest and/or
principal payments, these securities may be worthless and the fund could lose
its entire investment.
The prices of high yield debt securities fluctuate more than higher-quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by rating agencies.
Prices often are closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition,
the entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, stock market activity, large
sustained sales by major investors, a high-profile default, or other factors.
High yield securities generally are less liquid than higher-quality
securities. Many of these securities do not trade frequently, and when they
do their prices may be significantly higher or lower than expected. At times,
it may be difficult to sell these securities promptly at an acceptable price,
which may limit the fund's ability to sell securities in response to specific
economic events or to meet redemption requests.
LIQUIDITY The fund may have difficulty disposing of some convertible
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of an issuer.
STOCKS The convertible securities held by the fund are convertible into
common stocks, and are affected by changes in stock values. While stocks, as
a class, have historically outperformed other types of investments over the
long term, individual stock prices tend to go up and down more dramatically
over the short term. These price movements may result from factors affecting
individual companies or industries, or the securities market as a whole.
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices rise when interest rates fall.
Convertible security values tend to go up and down in response to changes in
interest rates in a similar manner, although not as dramatically as debt
securities due to their equity characteristics. In general, securities with
longer maturities usually are more sensitive to interest rate changes than
securities with shorter maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
additional risks that can increase the potential for losses in the fund.
These include country risks (due to general securities market movements in
any country where the fund has investments), company risks (due to less
stringent disclosure, accounting, auditing and financial reporting standards
and practices; less liquid securities; and less government supervision and
regulation of foreign markets and their participants), and currency risks
(due to fluctuations in currency exchange rates and the introduction of the
euro).
YEAR 2000 At this date, it appears neither the fund's operations nor the
issuers of its portfolio securities were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If
an issuer in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by issuers about their Year 2000 readiness, but could not
audit each issuer to verify its readiness. Although the risk of the Year 2000
problem should decrease over time, especially after the leap day of February
29, 2000, the possibility remains that the fund and issuers in which it is
invested may be adversely affected by Year 2000 problems until all of their
various data processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
-5.76% 33.62% 16.24% 20.54% -1.63% 24.19% 16.33% 20.27% -6.98% 21.15%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '91
14.43%
WORST
QUARTER:
Q3 '90
- -12.56%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Franklin Convertible Securities Fund - Class A 2 14.17% 13.04% 12.34%
Goldman Sachs Convertible 100 Index 3 20.57% 17.61% 12.95%
SINCE
INCEPTION
1 YEAR (10/2/95)
- --------------------------------------------------------------------------------
Franklin Convertible Securities Fund - Class C 2 18.11% 10.86%
Goldman Sachs Convertible 100 Index 3 20.57% 14.91%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard and Poor's Micropal. The unmanaged Goldman Sachs
Convertible 100 Index is comprised of a target of 100 securities, including
convertible bonds, preferreds, and mandatory convertible securities. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS C
- --------------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering 5.75% 1.99%
price
Load imposed on purchases 5.75% 1.00%
Maximum deferred sales charge (load) None 1 0.99% 2
Exchange fee 3 $5.00 $5.00
Please see "Choosing a Share Class" on page 45 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS C
- --------------------------------------------------------------------------------
Management fees 0.56% 0.56%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses 0.24% 0.24%
-------------------
Total annual fund operating expenses 1.05% 1.80%
===================
1. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
2. This is equivalent to a charge of 1% based on net asset value.
3. This fee is only for market timers (see page 58).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
If you sell your shares at the end of
the period:
CLASS A $676 1 $890 $1,121 $1,784
CLASS C $380 $661 $1,065 $2,195
If you do not sell your shares:
CLASS C $281 $661 $1,065 $2,195
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $235 billion in assets.
The team responsible for the fund's management is:
EDWARD B. JAMIESON, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Jamieson has been a manager of the fund since 1987. He joined the
Franklin Templeton Group in 1987.
EDWARD D. PERKS CFA, VICE PRESIDENT OF ADVISERS
Mr. Perks has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
RAYMOND CHAN, PORTFOLIO MANAGER OF ADVISERS
Mr. Chan has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1996.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 0.56% of its average monthly net
assets to the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995 2
- -------------------------------------------------------------------------------------------------
PER SHARE DATA ($)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 11.75 14.74 13.45 12.73 12.34
-------------------------------------------------
Net investment income .61 .62 .64 .61 .58
Net realized and unrealized
gains (losses) 1.03 (1.92) 2.15 1.39 1.10
-------------------------------------------------
Total from investment operations 1.64 (1.30) 2.79 2.00 1.68
-------------------------------------------------
Dividends from net investment income (.64) (.65) (.60) (.60) (.59)
Distributions from net realized gains - (1.04) (.90) (.68) (.70)
-------------------------------------------------
Total distributions (.64) (1.69) (1.50) (1.28) (1.29)
-------------------------------------------------
Net asset value, end of year 12.75 11.75 14.74 13.45 12.73
=================================================
Total return (%) 3 14.25 (9.93) 22.47 16.71 15.18
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 129,908 170,569 212,631 130,951 83,523
Ratios to average net assets: (%)
Expenses 1.05 .98 1.01 1.02 1.03
Net investment income 4.92 4.63 4.81 4.79 4.82
Portfolio turnover rate (%) 147.75 79.17 141.49 129.83 108.64
CLASS C
- --------------------------------------------------------------------------------------------------
PER SHARE DATA ($)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 11.70 14.68 13.41 12.71 13.06
--------------------------------------------------
Net investment income .51 .51 .54 .51 .07
Net realized and unrealized
gains (losses) 1.04 (1.91) 2.13 1.40 (.37)
--------------------------------------------------
Total from investment operations 1.55 (1.40) 2.67 1.91 (.30)
--------------------------------------------------
Dividends from net investment income (.55) (.54) (.50) (.53) (.05)
Distributions from net realized gains - (1.04) (.90) (.68) -
--------------------------------------------------
Total distributions (.55) (1.58) (1.40) (1.21) (.05)
--------------------------------------------------
Net asset value, end of year 12.70 11.70 14.68 13.41 12.71
==================================================
Total return (%) 3 13.48 (10.61) 21.54 15.92 (2.33)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 29,148 41,533 35,282 10,861 209
Ratios to average net assets: (%)
Expenses 1.80 1.73 1.74 1.79 1.60 4
Net investment income 4.16 3.93 4.04 4.00 3.64 4
Portfolio turnover rate (%) 147.75 79.17 141.49 129.83 108.64
</TABLE>
1. Based on average shares outstanding.
2. For the period October 1, 1995 (effective date) to October 31, 1995 for
Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
FRANKLIN EQUITY
INCOME FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to maximize total return by emphasizing
high current income and long-term capital appreciation, consistent with
reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of its
assets in common stocks offering current dividend yields that are higher than
the average yield of the stocks in the Standard & Poor's 500 Index ("S&P(R)
500"). The fund attempts to buy such stocks when they are selling at
attractive prices according to measurements such as relative dividend yield,
book value, revenues and normalized earnings. Using this approach, the fund
seeks to invest in these stocks when their prices may be temporarily
depressed, and while their dividends can provide current, steady income to
cushion against price declines.
[Begin callout]
The fund's principal investments are in common stocks with above average
dividend yields.
[End callout]
An equity security, or stock, represents a proportionate share of ownership
of a company; its value is based on the success of the company's business,
any income paid to stockholders, the value of its assets, and general market
conditions. The fund's manager emphasizes dividend yield in selecting stocks
for the fund because the manager believes that, over time, dividend income
can contribute significantly to total return. The manager also believes that
dividend income is often a more consistent source of investment return than
capital appreciation. Moreover, stocks with relatively higher dividend yields
tend to have less price volatility than stocks that pay out little dividend
income, and can provide greater stability of principal.
The manager evaluates the common stock dividend yields of many financially
strong companies as compared to the average dividend yield of the S&P(R) 500
over time. This results in a unique relative yield range for each company
that in turn provides a discipline for determining whether a stock is
attractively priced for purchase or sale. A higher relative dividend yield is
frequently accompanied by a lower stock price. Therefore, the fund seeks to
buy a stock when its relative dividend yield is high and to sell a stock when
its relative dividend yield is low, which may be caused by an increase in the
price of the stock.
While the fund does not concentrate in any one industry, it may make
significant investments in the telecommunications, utilities, financial
services and energy sectors. These industry sectors tend to have dividend
yield and/or valuation characteristics consistent with the fund's goal. The
fund may invest up to 30% of its assets in foreign securities, but presently
does not intend to invest more than 20% of its assets in foreign securities.
OTHER INVESTMENTS The fund may invest up to 35% of its net assets in any
combination of the following investments: common stocks with current dividend
yields at or below the S&P(R) 500 average, convertible securities, debt
securities, and real estate investment trusts (REITs). Debt securities
represent the obligation of the issuer to repay a loan of money to it, and
generally pay interest to the holder. Bonds, notes and debentures are
examples of debt securities. The fund does not intend to invest more than 15%
of its assets in REITs.
A convertible security is generally a debt security or preferred stock that
may be converted into common stock. By investing in convertible securities,
the fund seeks the opportunity to participate in the capital appreciation of
underlying stocks, while at the same time relying on the fixed income aspect
of the convertible securities to provide current income and reduced price
volatility, which can limit the risk of loss in a down equity market.
Securities rated in the top four ratings categories by independent rating
organizations such as Standard & Poor's Ratings Group and Moody's Investors
Service, Inc. are considered "investment grade." Convertible securities are
often within the lower-rated categories as determined by securities rating
organizations. Therefore, the fund may invest up to 10% of its total assets
in securities that are below investment grade, however, the fund will not
invest in securities rated below B or in unrated securities of comparable
quality. Generally, lower rated securities pay higher yields than more highly
rated securities to compensate investors for the higher risk.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economies of countries where the fund invests are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in common stocks.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks, as a class, have historically outperformed other types
of investments over the long term, individual stock prices tend to go up and
down more dramatically over the short term. These price movements may result
from factors affecting individual companies or industries, or the securities
market as a whole.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
VALUE INVESTING The fund's strategy of investing in stocks with high relative
dividend yields may mean that many of the stocks are considered value stocks.
A stock price is a "value" when it is less than the price at which the
manager believes it would trade if the market reflected all factors relating
to the company's worth. A value stock may not increase in price as
anticipated by the manager if other investors fail to recognize the company's
value and bid up the price, the markets favor faster-growing companies, or
the factors the manager believes will increase the price of the security do
not occur.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall or
when dividend income from investments in stocks declines.
INTEREST RATE Common stocks with higher dividend yields can be sensitive to
interest rate movements: when interest rates rise, the prices of these stocks
may tend to fall. The opposite can also be true: the prices of higher
yielding stocks may tend to rise when interest rates fall. Increases in
interest rates may also have a negative affect on the types of companies in
which the fund normally invests because these companies may find it more
difficult to obtain credit to expand, or may have more difficulty meeting
interest payments.
INDUSTRY RISKS To the extent that the fund has significant investments in any
industry, such as telecommunications, utilities, financial services and
energy sectors, it may be subject to the risks associated with those sectors.
TELECOMMUNICATIONS COMPANIES. Companies in the telecommunications industry
are subject to extensive government regulation and the industry is undergoing
rapid change due to advances in technology. Increasing competition, rapidly
changing markets, and changes in telephone and cable regulations are among
the many factors that can have a material effect on companies in the industry.
UTILITY COMPANIES. On-going regulatory changes and the development of
non-regulated providers has led to greater competition in the utilities
industry. This trend may make some companies less profitable. The utilities
industry is also subject to a variety of industry-specific risks, and utility
company stock prices are particularly sensitive to interest rate changes.
FINANCIAL SERVICES COMPANIES. Financial services companies are subject to
extensive government regulation. This regulation may affect a financial
company's profitability in many ways, including limiting the amount and types
of loans and commitments it can make and the interest rates and fees it can
charge. A financial services company's profitability, and therefore its stock
price, is especially sensitive to interest rate changes, as well as to the
ability of borrowers to repay their loans.
ENERGY COMPANIES. Companies that are involved in oil or gas exploration,
production, refining or marketing, or any combination of the above are
greatly affected by the prices and supplies of raw materials such as oil or
gas. The earnings and dividends of energy companies can fluctuate
significantly as a result of international economics, politics and regulation.
REAL ESTATE INVESTMENT TRUSTS. A REIT's performance depends on the types and
locations of the properties it owns and on how well it manages those
properties. The value of a REIT may also be affected by factors that affect
the underlying properties, the real estate industry, or local or general
economic conditions.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund. These
risks also apply to depositary receipts.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the fund's securities that
trade in that country. These movements will affect the fund's share price and
fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of internal and
external conflicts, the imposition of exchange controls, currency
devaluations, foreign ownership limitations, expropriation, restrictions on
removal of currency and other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks.
COMPANY. Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. The European Economic and Monetary Union (EMU) introduced a new single
currency, the euro, on January 1, 1999. It will replace the national currency
for participating member countries in stages through July 1, 2002.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency valuations and on the
business or financial condition of European issuers and issuers in other
regions, that the fund may hold in its portfolio.
YEAR 2000 At this date, it appears neither the fund's operations nor the
companies in which it invests were adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000
problems could still emerge. If a company in which the fund is invested
develops problems related to Year 2000, the price of its securities may be
adversely affected, and this may have an adverse effect on the fund's
performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by companies about their Year 2000 readiness, but could not
audit each company to verify its readiness. Although the risk of the Year
2000 problem should decrease over time, especially after the leap day of
February 29, 2000, the possibility remains that the fund and the companies in
which it is invested as well as the fund, may be adversely affected by Year
2000 problems until all of their various data processing activities for the
year have been completed.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
-8.84% 28.21% 13.25% 17.83% 0.33% 25.73% 12.73% 27.21% 6.69% 0.80%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '91
11.47%
WORST
QUARTER:
Q3 '90
- -13.69%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Franklin Equity Income Fund - Class A 2 -4.99% 12.82% 11.01%
Russell 3000 Value Index 3,4 6.65% 22.15% 15.31%
S&P 500(R)Index 4,5 21.04% 28.56% 18.21%
SINCE
INCEPTION
1 YEAR (1/1/99)
- --------------------------------------------------------------------------------
Franklin Equity Income Fund - Class B 2 -3.65% -3.65%
Russell 3000 Value Index 3,4 6.65% 6.65%
S&P 500(R)Index 4,5 21.04% 21.04%
SINCE
INCEPTION
1 YEAR (10/2/95)
- --------------------------------------------------------------------------------
Franklin Equity Income Fund - Class C 2 -1.88% 11.35%
Russell 3000 Value Index 3,4 6.65% 19.19%
S&P 500(R)Index 4,5 21.04% 26.39%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's Micropal. The unmanaged Russell 3000 Value Index
measures the performance of those Russell 3000 Index companies with lower
price-to-book ratios and lower forecasted growth values. The Russell 3000
Index includes the 3000 largest U.S. companies based on total market
capitalization, which represents approximately 98% of the investable U.S.
equity market. The index includes reinvested dividends.
4. The Russell 3000 Value Index is replacing the S&P 500(R) Index as the fund's
benchmark. The manager believes the composition of the Russell 3000 Value
Index provides a more appropriate comparison to the fund's current portfolio
because its investment characteristics, in terms of dividend yield, industry
representation and market capitalization, are more consistent with the fund's
growth and income strategy.
5. Source: Standard & Poor's Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B 1 CLASS C
- --------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 2 4.00% 3 0.99% 4
Exchange fee 5 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 45 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B 1 CLASS C
- --------------------------------------------------------------------------------
Management fees 0.50% 0.50% 0.50%
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
Other expenses 0.19% 0.19% 0.19%
---------------------------------
Total annual fund operating expenses 0.94% 1.69% 1.69%
=================================
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses for Class B are annualized.
2. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
3. Declines to zero after six years.
4. This is equivalent to a charge of 1% based on net asset value.
5. This fee is only for market timers (see page 58).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A $665 1 $857 $1,065 $1,663
CLASS B $572 $833 $1,118 $1,799 2
CLASS C $369 $627 $1,009 $2,078
If you do not sell your shares:
CLASS B $172 $533 $918 $1,799 2
CLASS C $270 $627 $1,009 $2,078
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $235 billion in assets.
The team responsible for the fund's management is:
FRANK FELICELLI CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Felicelli has been a manager of the fund since 1988. He joined the
Franklin Templeton Group in 1986.
WILLIAM HAWES, PORTFOLIO MANAGER OF ADVISERS
Mr. Hawes has been a manager of the fund since 1999. He joined the Franklin
Templeton Group in 1998. Previously, he was with North American Mortgage
Company.
HOWARD M. MCELDOWNEY, PORTFOLIO MANAGER OF ADVISERS
Mr. McEldowney has been generally involved with the investment strategy of
the fund's portfolio since the fund's inception and has more than 30 years'
experience in the securities industry.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 0.50% of its average monthly net
assets to the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------------------------
1999 1,5 1998 1997 1996 1995 2
- --------------------------------------------------------------------------------------------------
PER SHARE DATA ($)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 19.93 19.31 16.41 15.19 14.14
---------------------------------------------------
Net investment income .58 .64 .64 .64 .63
Net realized and unrealized gains .36 1.42 3.23 1.63 1.27
---------------------------------------------------
Total from investment operations .94 2.06 3.87 2.27 1.90
---------------------------------------------------
Dividends from net investment income (.60) (.65) (.64) (.65) (.61)
Distributions from net realized gains (1.07) (.79) (.33) (.40) (.24)
---------------------------------------------------
Total distributions (1.67) (1.44) (.97) (1.05) (.85)
---------------------------------------------------
Net asset value, end of year 19.20 19.93 19.31 16.41 15.19
===================================================
Total return (%) 3 4.90 10.96 24.40 15.39 14.10
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 385,968 428,228 352,555 246,952 168,897
Ratios to average net assets: (%)
Expenses .94 .94 .97 .98 1.00
Expenses excluding waiver and
payments by affiliate .94 .94 .97 .98 1.02
Net investment income 2.95 3.20 3.62 4.11 4.44
Portfolio turnover rate (%) 50.20 30.65 29.04 24.15 27.86
</TABLE>
CLASS B
- ----------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 19.37
-----------
Net investment income .33
Net realized and unrealized losses (.16)
-----------
Total from investment operations .17
-----------
Distributions from net investment
income (.38)
-----------
Net asset value, end of year 19.16
===========
Total return (%) 3 .86
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 2,493
Ratios to average net assets: (%)
Expenses 1.69 4
Net investment income 2.03 4
Portfolio turnover rate (%) 50.20
<TABLE>
<CAPTION>
CLASS C YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995 2
- --------------------------------------------------------------------------------------------------
PER SHARE DATA ($)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 19.88 19.26 16.38 15.19 15.38
---------------------------------------------------
Net investment income .43 .50 .50 .52 .05
Net realized and unrealized
gains (losses) .36 1.41 3.22 1.63 (.19)
---------------------------------------------------
Total from investment operations .79 1.91 3.72 2.15 (.14)
---------------------------------------------------
Dividends from net investment income (.46) (.50) (.51) (.56) (.05)
Distributions from net realized gains (1.07) (.79) (.33) (.40) -
---------------------------------------------------
Total distributions (1.53) (1.29) (.84) (.96) (.05)
Net asset value, end of year 19.14 19.88 19.26 16.38 15.19
===================================================
Total return (%) 3 4.11 10.16 23.40 14.53 (.93)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 82,353 81,078 45,277 18,227 386
Ratios to average net assets: (%)
Expenses 1.69 1.69 1.72 1.73 1.99 4
Net investment income 2.20 2.45 2.78 3.33 3.57 4
Portfolio turnover rate (%) 50.20 30.65 29.04 24.15 27.86
</TABLE>
1. Based on average shares outstanding.
2. For the period October 1, 1995 (effective date) to October 31, 1995 for
Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
5. For the period January 1, 1999 (effective date) to October 31, 1999 for
Class B.
FRANKLIN GLOBAL GOVERNMENT
INCOME FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide high current income, consistent
with preservation of capital, with capital appreciation as a secondary
consideration.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of its
assets in government securities of at least three different countries around
the world, one of which can be the U.S. Government securities include debt
securities issued or guaranteed by the U.S. or foreign governments and their
political subdivisions. Debt securities represent the obligation of the
issuer to repay a loan of money to it and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities.
[Begin callout]
The fund invests primarily in U.S. and foreign government debt securities.
[End callout]
The fund allocates its investments among various issuers, geographic regions
and currency denominations in an effort to provide a favorable combination of
yield, capital appreciation and/or currency appreciation. When selecting
investments, the manager evaluates economic and political conditions such as
inflation rate and the outlook for changes in interest rates, growth
prospects, global trade patterns and currency stability.
The fund normally invests its assets principally within North America (U.S.
and Canada), Western Europe, Australia and New Zealand, and Japan. The fund
may invest up to 30% of its assets in government securities of less developed
or developing countries, such as those in South America. As a global fund,
the fund may buy securities denominated in any currency, or in multinational
currency units such as the euro or the European Currency Unit (ECU), and the
fund may hold foreign or domestic currency deposits.
Securities rated in the top four ratings categories by independent rating
organizations such as Standard & Poor's Ratings Group and Moody's Investors
Service, Inc. are considered "investment grade." Most of the fund's debt
security investments are rated as investment grade, however, the fund may
invest up to 35% of assets in debt securities that are below investment
grade. The fund generally invests in securities rated at least B or unrated
securities of comparable quality. Generally, lower rated securities pay
higher yields than more highly rated securities to compensate investors for
the higher risk.
OTHER INVESTMENTS The fund may invest up to 35% of its assets in debt
securities of supranational entities and in semi-governmental securities,
which are securities that are not backed by the full faith and credit and
general taxing powers of the government, or that have only its implied
backing. The fund also uses forward currency exchange contracts to seek to
protect or enhance income or to protect the fund from adverse changes in the
relationship between currencies. A forward currency exchange contract is an
obligation to buy or sell a specific currency for an agreed price at a future
date that is individually negotiated and privately traded by currency traders
and their customers. The fund may also invest in equity or debt securities of
foreign or domestic non-governmental issuers.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the securities in which the fund
normally invests, or the economies of countries where the fund invests are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal because it may not invest or may invest
substantially less in foreign or domestic government securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The
opposite is also true: debt security prices rise when interest rates fall. In
general, securities with longer maturities usually are more sensitive to
interest rate changes than securities with shorter maturities. Increased
interest rates in the U.S. or abroad can also affect the economies of the
countries in which the fund invests.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of all the fund's debt securities will
fall and so too will the fund's share price and fund performance. This means
you could lose money.
[End callout]
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT Credit risk is the possibility that an issuer (including a government)
will be unable to make interest payments and repay principal. Changes in an
issuer's financial strength or in a security's credit rating may affect a
security's price and, thus, impact fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Issuers of high yield debt securities are not as strong financially as those
issuing securities with higher credit ratings. These issuers are more likely
to encounter financial difficulties and are more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates,
that could affect their ability to make interest and principal payments. If
an issuer stops making interest and/or principal payments, payments on the
securities may never resume. These securities may be worthless and the fund
could lose its entire investment.
The prices of high yield, debt securities fluctuate more than higher-quality
securities. Prices are especially sensitive to economic developments
affecting the issuer and to changes in the ratings assigned by rating
agencies. In addition, the entire high yield securities market can experience
sudden and sharp price swings due to changes in economic conditions, stock
market activity, large sustained sales by major investors, a high-profile
default, or other factors.
High yield securities generally are less liquid than higher-quality
securities. Many of these securities do not trade frequently, and when they
do their prices may be significantly higher or lower than expected. At times,
it may be difficult to sell these securities promptly at an acceptable price,
which may limit the fund's ability to sell securities in response to specific
economic events or to meet redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the fund's securities that
trade in that country. These movements will affect the fund's share price and
fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of legal, business and social frameworks to support
securities markets. Foreign securities markets, including emerging markets,
may have substantially lower trading volumes than U.S. markets, resulting in
less liquidity and more volatility than in the U.S. Short-term volatility in
these markets is not usual, nor are declines in excess of 50%.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have fully replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain. Currently, the exchange rate of the currencies of each of these
countries is fixed to the euro and the new European Central Bank has control
over each country's monetary policies. These countries' governments, however,
continue to have the authority to set tax and spending policies and public
debt levels.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European issuers whose securities the fund
may hold in its portfolio and, thus, the impact, if any, this will have on
the fund's performance. To the extent the fund holds non-U.S. dollar (euro or
other) denominated securities, it will also be exposed to currency risk due
to fluctuations in those currencies versus the U.S. dollar.
LIQUIDITY The fund may have difficulty disposing of some 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 sell particular securities when necessary to meet the
fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of an issuer.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. Economic, business, political or other changes that affect government
or other issuers in which the fund is heavily invested may result in greater
fluctuation in the price of the fund's shares than if the fund was more
widely diversified. The fund, however, intends to meet certain tax
diversification requirements.
YEAR 2000 At this date, it appears neither the fund's operations nor the
governments of countries where it invests were adversely affected by Year
2000 computer-related problems. However, Year 2000 problems could still
emerge. If an issuer in which the fund is invested develops problems related
to Year 2000, the price of its securities may be adversely affected, and this
may have an adverse effect on the fund's performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by issuers about their Year 2000 readiness, but could not
audit each issuer to verify its readiness. Although the risk of the Year 2000
problem should decrease over time, especially after the leap day of February
29, 2000, the possibility remains that the fund and issuers in which it is
invested may be adversely affected by Year 2000 problems until all of their
various data processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
7.59% 14.23% -0.25% 18.63% -7.76% 18.07% 10.76% 2.81% 5.84% 0.08%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '93
7.13%
WORST
QUARTER:
Q1 '94
- -5.24%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Franklin Global Government Income Fund - Class A 2 -4.21% 6.40% 6.23%
JP Morgan Global Government Bond Total
Return Index 3 -5.08% 6.69% 7.81%
SINCE
INCEPTION
1 YEAR (5/1/95)
- --------------------------------------------------------------------------------
Franklin Global Government Income Fund - Class C 2 -2.45% 5.87%
JP Morgan Global Government Bond Total Return Index 3 -5.08% 4.67%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's Micropal. The unmanaged JP Morgan Global
Government Bond Total Return Index includes only actively traded fixed-rate
bonds with a remaining maturity of one year or longer. It includes reinvested
interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS C
- --------------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering price 4.25% 1.99%
Load imposed on purchases 4.25% 1.00%
Maximum deferred sales charge (load) None 1 0.99% 2
Exchange fee 3 $5.00 $5.00
Please see "Choosing a Share Class" on page 45 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS C
- --------------------------------------------------------------------------------
Management fees 0.62% 0.62%
Distribution and service (12b-1) fees 0.12% 0.65%
Other expenses 0.32% 0.32%
-------------------
Total annual fund operating expenses 1.06% 1.59%
===================
1. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
2. This is equivalent to a charge of 1% based on net asset value.
3. This fee is only for market timers (see page 58).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
If you sell your shares at the end
of the period:
Class A $528 1 $748 $985 $1,664
Class C $359 $597 $957 $1,970
If you do not sell your shares:
Class C $260 $597 $957 $1,970
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394,
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor. A team from Global Bond Managers provides Advisers
with investment management advice and assistance and is responsible for the
day-to-day management of the fund.
The team responsible for the fund's management is:
THOMAS J. DICKSON, VICE PRESIDENT OF GLOBAL BOND MANAGERS
Mr. Dickson has been a manager of the fund since 1993. He joined the Franklin
Templeton Group in 1992.
DR. UMRAN DEMIRORS, EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER OF
GLOBAL BOND MANAGERS
Dr. Demirors has been a manager of the fund since January 1999. He joined the
Franklin Templeton Group in 1996. Previously, he was a principal and
portfolio manager for Socimer Advisory Inc. and the head of research and
strategy at Vestcor Partners Group.
ALEXANDER C. CALVO, VICE PRESIDENT OF GLOBAL BOND MANAGERS
Mr. Calvo has been a manager of the fund since January 1999. He joined the
Franklin Templeton Group in 1995. Previously, he was an account executive
with Fleishman-Hillard, where he served as a consultant to firms investing in
Latin America.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 0.62% of its average monthly net
assets to the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------------------------------------------
1999 5 1998 5 1997 1996 1995 2
- -----------------------------------------------------------------------------------------------------
PER SHARE DATA ($)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 8.25 8.41 8.65 8.31 8.06
------------------------------------------------------
Net investment income .58 .60 .60 .61 .67
Net realized and unrealized
gains (losses) (.51) (.15) (.22) .33 .29
------------------------------------------------------
Total from investment operations .07 .45 .38 .94 .96
------------------------------------------------------
Dividends from net investment income (.58) (.57) (.61) (.60) (.64)
In excess of net investment income - (.04) (.01) - -
Tax return of capital - - - - (.07)
Distributions from net realized gains (.02) - - - -
------------------------------------------------------
Total distributions (.60) (.61) (.62) (.60) (.71)
------------------------------------------------------
Net asset value, end of year 7.72 8.25 8.41 8.65 8.31
======================================================
Total return (%) 3 .90 5.57 4.31 11.80 12.65
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 85,004 110,876 118,348 137,626 164,970
Ratios to average net assets: (%)
Expenses 1.06 .96 .90 .85 .96
Net investment income 7.28 7.17 6.97 7.68 8.29
Portfolio turnover rate (%) 61.50 49.93 193.30 139.71 103.49
CLASS C
- -----------------------------------------------------------------------------------------------------
PER SHARE DATA ($)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 8.26 8.41 8.65 8.31 8.03
------------------------------------------------------
Net investment income .54 .55 .55 .56 .31
Net realized and unrealized
gains (losses) (.51) (.14) (.22) .33 .30
------------------------------------------------------
Total from investment operations .03 .41 .33 .89 .61
------------------------------------------------------
Dividends from net investment income (.54) (.52) (.56) (.55) (.30)
In excess of net investment income - (.04) (.01) - -
Tax return of capital - - - - (.03)
Net realized gains (.02) - - - -
------------------------------------------------------
Total distributions (.56) (.56) (.57) (.55) (.33)
------------------------------------------------------
Net asset value, end of year 7.73 8.26 8.41 8.65 8.31
======================================================
Total return (%) 3 .36 5.12 3.74 11.19 7.09
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 4,744 5,710 4,473 3,700 1,193
Ratios to average net assets: (%)
Expenses 1.59 1.49 1.46 1.40 1.54 4
Net investment income 6.77 6.64 6.43 7.17 7.41 4
Portfolio turnover rate (%) 61.50 49.93 193.30 139.71 103.49
</TABLE>
1. Based on average shares outstanding for Class C for 1998 and for Class A &
C for 1999.
2. For the period May 1, 1995 (effective date) to October 31, 1995 for Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
5. The per share amounts of net investment income and net realized and
unrealized gains (losses) and the net investment income ratio have been restated
from the 1999 annual report to shareholders to reflect the correction of an
error.
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide as high a level of current
income as is consistent with prudent investing, while seeking preservation of
shareholders' capital.
PRINCIPAL INVESTMENT STRATEGIES The fund invests most of its assets in
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, with an emphasis on mortgage securities. The fund also
invests in direct obligations of the U.S. government, such as Treasury bonds,
bills and notes. All of the fund's principal investments are debt securities.
Debt securities represent the obligation of the issuer to repay a loan of
money to it and generally pay interest to the holder. Bonds, notes and
debentures are examples of debt securities.
[Begin callout]
The fund invests in securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities, with an emphasis on mortgage securities.
[End callout]
Mortgage securities represent an ownership in mortgage loans made by banks
and other financial institutions to finance purchases of homes, commercial
buildings and other real estate. The individual loans are packaged or
"pooled" together for sale to investors. As the underlying mortgage loans are
paid off, investors receive principal and interest payments. The mortgage
securities purchased by the fund include bonds and notes issued by the
Federal Home Loan Banks, Federal National Mortgage Association (FNMA),
Government National Mortgage Association (GNMA) and Federal Home Loan
Mortgage Corporation (FHLMC).
Government agency or instrumentality issues have different levels of credit
support. GNMA securities are supported by the full faith and credit of the
U.S. government; FNMA securities are supported by its right to borrow from
the U.S. Treasury under certain circumstances; and FHLMC securities are
supported only by the credit of that instrumentality. The government (or
government agency) guarantee only applies to the timely repayment of
principal and interest and not to the market prices and yields of the
securities or to the net asset value or performance of the fund, which will
vary with changes in interest rates and other market conditions.
The fund normally maintains the average dollar-weighted maturity of its
portfolio in a range of two to five years. The average weighted maturity of
the fund will vary with market conditions and the outlook for interest rates.
In determining a security's maturity for purposes of calculating the fund's
average maturity, an estimate of the average time for its principal
to be paid may be used. This can be substantially shorter than its stated
final maturity.
The fund may invest in callable agency securities, which give the issuer (the
U.S. government agency) the right to redeem the security prior to maturity.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities markets, the economy, or the securities in
which the fund normally invests are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goal because
it may not invest or may invest substantially less in mortgage and government
agency securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities prices fall. The
opposite is also true: debt security prices rise when interest rates fall. In
general, securities with longer maturities usually are more sensitive to
interest rate changes than securities with shorter maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
MORTGAGE SECURITIES Mortgage securities differ from conventional debt
securities because principal is paid back over the life of the security
rather than at maturity. The fund may receive unscheduled prepayments of
principal due to voluntary prepayments, refinancing, or foreclosure on the
underlying mortgage loans. During periods of declining interest rates, the
volume of principal prepayments generally increases as borrowers refinance
their mortgages at lower rates, and issuers of callable securities typically
exercise call options. The fund may be forced to reinvest assets at lower
interest rates, reducing the fund's income. For this reason, mortgage
securities may be less effective than other securities as a means of "locking
in" long-term interest rates and may have less potential for capital
appreciation during periods of falling interest rates than other securities
with similar maturities.
A reduction in the anticipated rate of principal prepayments, especially
during periods of rising interest rates, may increase the effective maturity
of mortgage-backed and callable agency securities, making them more
susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase the volatility of the fund's
performance and share price and thus the fund's average maturity. Securities
with longer maturities generally fluctuate more widely in response to changes
in interest rates than short- or intermediate-term securities.
YEAR 2000 At this date, it appears neither the fund's operations nor the
issuers of its portfolio securities were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If
an issuer in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by issuers about their Year 2000 readiness, but could not
audit each issuer to verify its readiness. Although the risk of the Year 2000
problem should decrease over time, especially after the leap day of February
29, 2000, the possibility remains that the fund and issuers in which it is
invested may be adversely affected by Year 2000 problems until all of their
various data processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
9.65% 12.06% 6.64% 7.75% -2.15% 11.09% 3.99% 6.09% 6.55% 1.51%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q3 '92
4.97%
WORST
QUARTER:
Q1 '94
- -1.86%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Franklin Short-Intermediate U.S. Government
Securities Fund - Class A 2 -0.78% 5.32% 5.99%
Lehman Brothers Short U.S. Treasury 1-5 Year Index 3 1.89% 6.74% 6.88%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains. May
1, 1994, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index includes
U.S. government securities and treasuries with maturities from one to five
years. It includes reinvested interest. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A
- --------------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering price 2.25%
Load imposed on purchases 2.25%
Maximum deferred sales charge (load) None 1
Exchange fee 2 $5.00
Please see "Choosing a Share Class" on page 45 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A
- --------------------------------------------------------------------------------
Management fees 0.56%
Distribution and service (12b-1) fees 0.10%
Other expenses 0.13%
--------------
Total annual fund operating expenses 0.79%
==============
1. Except for investments of $1 million or more (see page 46) and purchases
by certain retirement plans without an initial sales charge.
2. This fee is only for market timers (see page 58).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $304 1 $472 $654 $1,181
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $235 billion in assets.
The team responsible for the fund's management is:
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since December 1999. He joined the
Franklin Templeton Group in 1991.
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager of the fund since December 1999. He joined the
Franklin Templeton Group in 1989.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1987 and has more than 30
years' experience in the securities industry.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 0.56% of its average monthly net
assets to the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
PER SHARE DATA ($)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year 10.46 10.29 10.28 10.35 10.03
------------------------------------------------
Net investment income .53 .54 .57 .58 .56
Net realized and unrealized
gains (losses) (.38) .19 .02 (.08) .31
------------------------------------------------
Total from investment operations .15 .73 .59 .50 .87
------------------------------------------------
Dividends from net Investment income (.50) (.56) (.58) (.57) (.55)
------------------------------------------------
Net asset value, end of year 10.11 10.46 10.29 10.28 10.35
================================================
Total return (%) 2 1.51 7.38 5.88 4.97 8.90
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 176,114 224,132 192,051 196,042 208,057
Ratios to average net assets: (%)
Expenses .79 .78 .78 .74 .73
Net investment income 5.18 5.24 5.51 5.64 5.42
Portfolio turnover rate (%) 64.26 37.70 40.56 72.62 56.34
</TABLE>
1. Based on average shares outstanding.
2. Total return does not include sales charges.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The Global Fund, Convertible Fund and
Equity Fund intend to pay a dividend at least monthly representing their net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund
will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of a fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of
a taxable distribution. If you would like information on upcoming record
dates for a fund's distributions, please call 1-800/DIAL BEN.
The Short-Intermediate Fund declares dividends daily from its net investment
income and pays them monthly on or about the last day of the month. Your
account may begin to receive dividends on the day after we receive your
investment and will continue to receive dividends through the day we receive
a request to sell your shares. Capital gains, if any, may be distributed
annually. The amount of these distributions will vary and there is no
guarantee the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gains distribution from its net asset value, you will
receive some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Any foreign taxes
the Global Fund pays on its investments may be passed through to you as a
foreign tax credit. Non-U.S. investors may be subject to U.S. withholding and
estate tax. You should consult your tax advisor about the federal, state,
local or foreign tax consequences of your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
o Initial sales charge o No initial sales o Initial sales charge
of 5.75% (Convertible charge of 1%
Fund and Equity Fund),
4.25% (Global Fund),
2.25%
(Short-Intermediate
Fund) or less
o Deferred sales charge o Deferred sales charge o Deferred sales charge
of 1% on purchases of of 4% on shares you of 1% on shares you
$1 million or more sell within the first sell within 18 months
sold within 12 months year, declining to 1%
within six years and
eliminated after that
o Lower annual expenses o Higher annual o Higher annual expenses
than Class B or C due expenses than Class A than Class A (same as
to lower distribution (same as Class C) due Class B) due to higher
fees to higher distribution fees. No
distribution fees. conversion to Class A
Automatic conversion shares, so annual
to Class A shares expenses do not
after eight years, decrease.
reducing future
annual expenses.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- --------------------------------------------------------------------------------
CONVERTIBLE FUND AND EQUITY FUND
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
GLOBAL FUND
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
SHORT-INTERMEDIATE FUND
Under $100,000 2.25 2.30
$100,000 but under $250,000 1.75 1.78
$250,000 but under $500,000 1.25 1.26
$500,000 but under $1 million 1.00 1.01
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as
a lump sum or through our cumulative quantity discount or letter of intent
programs (see page 48), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page 47).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Convertible Fund and
Equity Fund to pay distribution fees of up to 0.25% per year, the Global Fund
to pay distribution fees of up to 0.15% per year, and the Short-Intermediate
Fund to pay distribution fees of up to 0.10% per year to those who sell and
distribute Class A shares and provide other services to shareholders. Because
these fees are paid out of Class A's assets on an on-going basis, over time
these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
SALES CHARGES - CLASS B - EQUITY FUND
IF YOU SELL YOUR SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page 47). After 8 years, your Class B shares automatically convert to Class A
shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.
RETIREMENT PLANS Class B shares are available to certain retirement plans,
including IRAs (of any type), Franklin Templeton Trust Company 403(b) plans,
and Franklin Templeton Trust Company qualified plans with participant or
earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Equity Fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- --------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Convertible Fund and
the Equity Fund to pay distribution and other fees of up to 1% and the Global
Fund to pay distribution and other fees of up to 0.65% per year for the sale
of Class C shares and for services provided to shareholders. Because these
fees are paid out of Class C's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page 53 for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or
by investors who reinvest certain distributions and proceeds within 365 days.
Certain investors also may buy Class C shares without an initial sales
charge. The CDSC for each class may be waived for certain redemptions and
distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Plan Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------------
Regular accounts $1,000 $50
UGMA/UTMA accounts $100 $50
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education IRAs or
Roth IRAs)
IRAs, IRA rollovers, Education IRAs or Roth IRAs $250 $50
Broker-dealer sponsored wrap account programs $250 $50
Full-time employees, officers, trustees and directors $100 $50
of
Franklin Templeton entities, and their immediate family members
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE IN YOUR
STATE OR JURISDICTION.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of Contact your investment Contact your investment
hands shaking] representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Make your check payable Make your check payable
envelope] to the fund. to the fund. Include
your account number on
BY MAIL Mail the check and your the check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do
not have a slip, include
a note with your name,
the fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and control number and wire
bolts] wire instructions. instructions.
BY WIRE Wire the funds and mail To make a same day wire
your signed application investment, please call
1-800/632-2301 to Investor Services. us by 1:00 p.m. Pacific
(or 1-650/312-2000 Please include the wire time and make sure your
collect) control number or your wire arrives by 3:00 p.m.
new account number on
the application.
To make a same day wire
investment, please call
us by 1:00 p.m. Pacific
time and make sure your
wire arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services Call Shareholder Services
two arrows pointing at the number below, or at the number below or
in opposite directions] send signed written our
instructions. The automated TeleFACTS
BY EXCHANGE TeleFACTS system,
system cannot be used to or send signed written
TeleFACTS(R) open a new account. instructions.
1-800/247-1753
(around-the-clock (Please see page 53 for (Please see page 53 for
access) information on exchanges.) information on
exchanges.)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest
in a fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account
with an automatic investment plan is $50 ($25 for an Education IRA). To sign
up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of a fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please
call 1-800/527-2020 for information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to
sell or exchange your shares and make certain other changes to your account
by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A of the
Convertible Fund or the Equity Fund without any sales charge. Advisor Class
shareholders who exchange their shares for Convertible Fund or Equity Fund
Class A shares and later decide they would like to exchange into another fund
that offers Advisor Class may do so.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page 58).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the funds we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
funds against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 59 1/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- --------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- --------------------------------------------------------------------------------
[Insert graphic Contact your investment representative
of hands shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
BY MAIL accounts may need to send additional documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. If you own
both Class A and B shares of the Equity Fund, also
specify the class of shares, otherwise we will sell
your Class A shares first. Be sure to include all
necessary signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
- --------------------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or less,
of phone] you do not hold share certificates and you have not
changed your address by phone within the last 15 days,
BY PHONE you can sell your shares by phone.
1-800/632-2301 A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check
to another address or to make it payable to another
person.
- --------------------------------------------------------------------------------
[Insert graphic You can call or write to have redemption proceeds sent
of three to a bank account. See the policies above for selling
lightning bolts] shares by mail or phone.
BY ELECTRONIC FUNDS Before requesting to have redemption proceeds sent to a
TRANSFER (ACH) bank account, please make sure we have your bank
account information on file. If we do not have this
information, you will need to send written instructions
with your bank's name and address, a voided check or
savings account deposit slip, and a signature guarantee
if the ownership of the bank and fund accounts is
different.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
- --------------------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you are
of two arrows considering.
pointing in
opposite directions] Call Shareholder Services at the number below or our
automated TeleFACTS system, or send signed written
BY EXCHANGE instructions. See the policies above for selling shares
by mail or phone.
TeleFACTS(R)
1-800/247-1753 If you hold share certificates, you will need to return
(around-the-clock them to the fund before your exchange can be processed.
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. Pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its
applicable minimum investment amount. If you choose not to do so within 30
days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). You
also will receive the funds' financial reports every six months. To reduce
fund expenses, we try to identify related shareholders in a household and
send only one copy of the financial reports. If you need additional copies,
please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two
or more owners are registered as "joint tenants with rights of survivorship"
(shown as "Jt Ten" on your account statement). To make any ownership changes
to a joint account, all owners must agree in writing, regardless of the law
in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the funds' transfer agent. You
will be considered a market timer if you have (i) requested an exchange out
of the fund within two weeks of an earlier exchange request, or (ii)
exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CONVERTIBLE FUND (CLASS A AND CLASS C ONLY) AND EQUITY FUND
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00 1 - -
12B-1 FEE TO DEALER 0.25 0.25 2 1.00 3
GLOBAL FUND
CLASS A CLASS C
- --------------------------------------------------------------------------------
COMMISSION (%) - 2.00
Investment under $100,000 4.00 -
$100,000 but under $250,000 3.25 -
$250,000 but under $500,000 2.25 -
$500,000 but under $1 million 1.85 -
$1 million or more up to 0.75 1 -
12B-1 FEE TO DEALER 0.15 0.65 3
SHORT-INTERMEDIATE FUND
CLASS A
- --------------------------------------------------------------------------------
COMMISSION (%) -
Investment under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.00
$500,000 but under $1 million 0.85
$1 million or more up to 0.75 1
12B-1 FEE TO DEALER 0.10
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and on Class C NAV purchases. A dealer commission
of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% for the Convertible Fund
and the Equity Fund and 0.15% for the Global Fund during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ----------------------------------------------------------------------------
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/ 342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/ 527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the
SAI, please contact your investment representative or call us at the number
below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: publicinfo(R)sec.gov.
Investment Company Act file #811-4986 FIST1 P 03/00
PROSPECTUS
FRANKLIN
INVESTORS
SECURITIES TRUST
ADVISOR CLASS
INVESTMENT STRATEGY
GLOBAL INCOME
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
INCOME
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
MARCH 1, 2000
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Franklin Global Government Income Fund
12 Franklin Short-Intermediate
U.S. Government Securities Fund
20 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
22 Qualified Investors
24 Buying Shares
25 Investor Services
28 Selling Shares
30 Account Policies
32 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN GLOBAL
GOVERNMENT INCOME FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide high current income, consistent
with preservation of capital, with capital appreciation as a secondary
consideration.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of its
assets in government securities of at least three different countries around the
world, one of which can be the U.S. Government securities include debt
securities issued or guaranteed by the U.S. or foreign governments and their
political subdivisions. Debt securities represent the obligation of the issuer
to repay a loan of money to it and generally pay interest to the holder. Bonds,
notes and debentures are examples of debt securities.
[Begin callout]
The fund invests primarily in U.S. and foreign government debt securities.
[End callout]
The fund allocates its investments among various issuers, geographic regions and
currency denominations in an effort to provide a favorable combination of yield,
capital appreciation and/or currency appreciation. When selecting investments,
the manager evaluates economic and political conditions such as inflation rate
and the outlook for changes in interest rates, growth prospects, global trade
patterns and currency stability.
The fund normally invests its assets principally within North America (U.S. and
Canada), Western Europe, Australia and New Zealand, and Japan. The fund may
invest up to 30% of its assets in government securities of less developed or
developing countries, such as those in South America. As a global fund, the fund
may buy securities denominated in any currency, or in multinational currency
units such as the euro or the European Currency Unit (ECU), and the fund may
hold foreign or domestic currency deposits.
Securities rated in the top four ratings categories by independent rating
organizations such as Standard & Poor's Ratings Group and Moody's Investors
Service, Inc. are considered "investment grade." Most of the fund's debt
security investments are rated as investment grade, however, the fund may invest
up to 35% of assets in debt securities that are below investment grade. The fund
generally invests in securities rated at least B or unrated securities of
comparable quality. Generally, lower rated securities pay higher yields than
more highly rated securities to compensate investors for the higher risk.
OTHER INVESTMENTS The fund may invest up to 35% of its assets in debt securities
of supranational entities and in semi-governmental securities, which are
securities that are not backed by the full faith and credit and general taxing
powers of the government, or that have only its implied backing. The fund also
uses forward currency exchange contracts to seek to protect or enhance income or
to protect the fund from adverse changes in the relationship between currencies.
A forward currency exchange contract is an obligation to buy or sell a specific
currency for an agreed price at a future date that is individually negotiated
and privately traded by currency traders and their customers. The fund may also
invest in equity or debt securities of foreign or domestic non-governmental
issuers.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities markets, the securities in which the fund normally
invests, or the economies of countries where the fund invests are experiencing
excessive volatility or a prolonged general decline, or other adverse conditions
exist. Under these circumstances, the fund may be unable to pursue its
investment goal because it may not invest or may invest substantially less in
foreign or domestic government securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities. Increased interest rates in the
U.S. or abroad can also affect the economies of the countries in which the fund
invests.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of all the fund's debt securities will fall
and so too will the fund's share price and fund performance. This means you
could lose money.
[End callout]
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT Credit risk is the possibility that an issuer (including a government)
will be unable to make interest payments and repay principal. Changes in an
issuer's financial strength or in a security's credit rating may affect a
security's price and, thus, impact fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Issuers of high yield debt securities are not as strong financially as those
issuing securities with higher credit ratings. These issuers are more likely to
encounter financial difficulties and are more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates,
that could affect their ability to make interest and principal payments. If an
issuer stops making interest and/or principal payments, payments on the
securities may never resume. These securities may be worthless and the fund
could lose its entire investment.
The prices of high yield, debt securities fluctuate more than higher-quality
securities. Prices are especially sensitive to economic developments affecting
the issuer and to changes in the ratings assigned by rating agencies. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, stock market activity,
large sustained sales by major investors, a high-profile default, or other
factors.
High yield securities generally are less liquid than higher-quality securities.
Many of these securities do not trade frequently, and when they do their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. may involve risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund has
investments are likely to affect the value of the fund's securities that trade
in that country. These movements will affect the fund's share price and fund
performance.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, currency devaluations, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and settlement
risks.
The fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened risks
due to a lack of legal, business and social frameworks to support securities
markets. Foreign securities markets, including emerging markets, may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than in the U.S. Short-term volatility in these
markets is not usual, nor are declines in excess of 50%.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars. Devaluation of a
currency by a country's government or banking authority also will have a
significant impact on the value of any securities denominated in that currency.
Currency markets generally are not as regulated as securities markets.
EURO. On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have fully replaced the national
currencies of the following member countries: Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro and the new European Central Bank has control over each
country's monetary policies. These countries' governments, however, continue to
have the authority to set tax and spending policies and public debt levels.
Because this change to a single currency is new and untested, it is not possible
to predict the impact of the euro on currency values or on the business or
financial condition of European issuers whose securities the fund may hold in
its portfolio and, thus, the impact, if any, this will have on the fund's
performance. To the extent the fund holds non-U.S. dollar (euro or other)
denominated securities, it will also be exposed to currency risk due to
fluctuations in those currencies versus the U.S. dollar.
LIQUIDITY The fund may have difficulty disposing of some 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 sell particular securities when necessary to meet the fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of an issuer.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified fund.
Economic, business, political or other changes that affect government or other
issuers in which the fund is heavily invested may result in greater fluctuation
in the price of the fund's shares than if the fund was more widely diversified.
The fund, however, intends to meet certain tax diversification requirements.
YEAR 2000 At this date, it appears neither the fund's operations nor the
governments of countries where it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If an
issuer in which the fund is invested develops problems related to Year 2000, the
price of its securities may be adversely affected, and this may have an adverse
effect on the fund's performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by issuers about their Year 2000 readiness, but could not audit each issuer
to verify its readiness. Although the risk of the Year 2000 problem should
decrease over time, especially after the leap day of February 29, 2000, the
possibility remains that the fund and issuers in which it is invested may be
adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
[Begin callout]
BEST
QUARTER:
Q1 '93
7.13%
WORST
QUARTER:
Q1 '94
- -5.24%
[End callout]
7.59% 14.23% -0.25 18.63% -7.76% 18.07% 10.76% 3.75% 5.83% 0.20%
- --------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
================================================================================
Franklin Global Government Income Fund 1 0.20% 7.54% 6.80%
- - Advisor Class
JP Morgan Global Government Bond Total -5.08% 6.69% 7.81%
Return Index 2
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged JP Morgan Global
Government Bond Total Return Index includes only actively traded fixed-rate
bonds with a remaining maturity of one year or longer. It includes reinvested
interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
================================================================================
Maximum sales charge (load) imposed on purchases None
Exchange fee1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
================================================================================
Management fees 0.62%
Distribution and service (12b-1) fees None
Other expenses 0.32%
---------------
Total annual fund operating expenses 0.94%
---------------
1. This fee is only for market timers (see page 31).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
===========================================================================
$96 $300 $520 $1,155
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (Investment
Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394, through its
Templeton Global Bond Managers division (Global Bond Managers), is the fund's
sub-advisor. A team from Global Bond Managers provides Advisers with investment
management advice and assistance and is responsible for the day-to-day
management of the fund.
The team responsible for the fund's management is:
THOMAS J. DICKSON, VICE PRESIDENT OF GLOBAL BOND MANAGERS
Mr. Dickson has been a manager of the fund since 1993. He joined the Franklin
Templeton Group in 1992.
DR. UMRAN DEMIRORS, EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER OF
GLOBAL BOND MANAGERS
Dr. Demirors has been a manager of the fund since January 1999. He joined the
Franklin Templeton Group in 1996. Previously, he was a principal and
portfolio manager for Socimer Advisory Inc. and the head of research and
strategy at Vestcor Partners Group.
ALEXANDER C. CALVO, VICE PRESIDENT OF GLOBAL BOND MANAGERS
Mr. Calvo has been amanager of the fund since January 1999. He joined the
Franklin Templeton Group in 1995. Previously, he was an account executive with
Fleishman-Hillard, where he served as a consultant to firms investing in Latin
America.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal year
ended October 31, 1999, the fund paid 0.62% of its average monthly net assets to
the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
==========================================================================
1999 5 1998 5 1997 2
==========================================================================
PER SHARE DATA ($)
Net asset value, beginning of year 8.26 8.41 8.71
---------------------------
Net investment income .59 .62 .49
Net realized and unrealized gains (losses) (.51) (.15) (.28)
---------------------------
Total from investment operations .08 .47 .21
---------------------------
Less distributions from:
Net investment income (.59) (.58) (.49)
In excess of net investment income - (.04) (.02)
Net realized gains (.02) - -
---------------------------
Total distributions (.61) (.62) (.51)
---------------------------
Net asset value, end of year 7.73 8.76 8.41
===========================
Total return (%)3 1.03 5.81 2.49
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 694 829 741
Ratios to average net assets: (%)
Expenses .94 .85 .82 4
Net investment income 7.43 7.30 7.08 4
Portfolio turnover rate (%) 61.50 49.93 193.30
1. Based on average shares outstanding.
2. For the period January 2, 1997 (effective date) to October 31, 1997.
3. Total return is not annualized.
4. Annualized.
5. The per share amounts of net investment income and net realized an unrealized
gains (losses) and the net investment income ratio have been restated from
the 1999 annual report to shareholders to reflect the correction of an error.
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to provide as high a level of current income
as is consistent with prudent investing, while seeking preservation of
shareholders' capital.
PRINCIPAL INVESTMENT STRATEGIES The fund invests most of its assets in
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities, with an emphasis on mortgage securities. The fund also
invests in direct obligations of the U.S. government, such as Treasury bonds,
bills and notes. All of the fund's principal investments are debt securities.
Debt securities represent the obligation of the issuer to repay a loan of money
to it and generally pay interest to the holder. Bonds, notes and debentures are
examples of debt securities.
[Begin callout]
The fund invests in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, with an emphasis on mortgage securities.
[End callout]
Mortgage securities represent an ownership in mortgage loans made by banks and
other financial institutions to finance purchases of homes, commercial buildings
and other real estate. The individual loans are packaged or "pooled" together
for sale to investors. As the underlying mortgage loans are paid off, investors
receive principal and interest payments. The mortgage securities purchased by
the fund include bonds and notes issued by the Federal Home Loan Banks, Federal
National Mortgage Association (FNMA), Government National Mortgage Association
(GNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Government agency or instrumentality issues have different levels of credit
support. GNMA securities are supported by the full faith and credit of the U.S.
government; FNMA securities are supported by its right to borrow from the U.S.
Treasury under certain circumstances; and FHLMC securities are supported only by
the credit of that instrumentality. The government (or government agency)
guarantee only applies to the timely repayment of principal and interest and not
to the market prices and yields of the securities or to the net asset value or
performance of the fund, which will vary with changes in interest rates and
other market conditions.
The fund normally maintains the average dollar-weighted maturity of its
portfolio in a range of two to five years. The average weighted maturity of the
fund will vary with market conditions and the outlook for interest rates. In
determining a security's maturity for purposes of calculating the fund's average
maturity, an estimate of the average time for its principal to be paid may be
used. This can be substantially shorter than its stated final maturity.
The fund may invest in callable agency securities, which give the issuer (the
U.S. government agency) the right to redeem the security prior to maturity.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities markets, the economy, or the securities in which the
fund normally invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these circumstances,
the fund may be unable to pursue its investment goal because it may not invest
or may invest substantially less in mortgage and government agency securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities prices fall. The
opposite is also true: debt security prices rise when interest rates fall. In
general, securities with longer maturities usually are more sensitive to
interest rate changes than securities with shorter maturities.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
MORTGAGE SECURITIES Mortgage securities differ from conventional debt securities
because principal is paid back over the life of the security rather than at
maturity. The fund may receive unscheduled prepayments of principal due to
voluntary prepayments, refinancing, or foreclosure on the underlying mortgage
loans. During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at lower
rates, and issuers of callable securities typically exercise call options. The
fund may be forced to reinvest assets at lower interest rates, reducing the
fund's income. For this reason, mortgage securities may be less effective than
other securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other securities with similar maturities.
A reduction in the anticipated rate of principal prepayments, especially during
periods of rising interest rates, may increase the effective maturity of
mortgage-backed and callable agency securities, making them more susceptible
than other debt securities to a decline in market value when interest rates
rise. This could increase the volatility of the fund's performance and share
price and thus the fund's average maturity. Securities with longer maturities
generally fluctuate more widely in response to changes in interest rates than
short- or intermediate-term securities.
YEAR 2000 At this date, it appears neither the fund's operations nor the issuers
of its portfolio securities were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If an
issuer in which the fund is invested develops problems related to Year 2000, the
price of its securities may be adversely affected, and this may have an adverse
effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by issuers about their Year 2000 readiness, but could not audit each issuer
to verify its readiness. Although the risk of the Year 2000 problem should
decrease over time, especially after the leap day of February 29, 2000, the
possibility remains that the fund and issuers in which it is invested may be
adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1
BEST
QUARTER:
Q3 '92
4.97%
WORST
QUARTER:
Q1 '94
- -1.86%
9.65% 12.06% 6.64% 7.75% -2.15 11.09% 3.99% 6.24% 6.44% 1.63%
- --------------------------------------------------------------------------------
90 91 92 93 94 95 96 97 98 99
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 Year 5 Years 10 Years
================================================================================
Franklin Short-Intermediate U.S. Government
Securities Fund - Advisor Class 1 1.63% 5.85% 6.26%
Lehman Brothers Short U.S. Treasury 1-5 Year
Index 2 1.89% 6.74% 6.88%
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
2. The unmanaged Lehman Brothers Short U.S. Treasury 1-5 Year Index includes
U.S. government securities and treasuries with maturities from one to five
years. It includes reinvested interest. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
================================================================================
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND
ASSETS)
ADVISOR CLASS
================================================================================
Management fees 0.56%
Distribution and service (12b-1) fees None
Other expenses 0.13%
-----------------
Total annual fund operating expenses 0.69%
=================
1. This fee is only for market timers (see page 31).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 Year 3 Years 5 Years 10 Years
================================================================================
$70 221 384 859
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $235 billion in assets.
The team responsible for the fund's management is:
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since December 1999. He joined the
Franklin Templeton Group in 1991.
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager of the fund since December 1999. He joined the
Franklin Templeton Group in 1989.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1987 and has more than 30
years' experience in the securities industry.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal year
ended October 31, 1999, the fund paid 0.56% of its average monthly net assets to
the manager for its services.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
================================================================================
1999 1 1998 1997 2
================================================================================
Per share data ($)
Net asset value, beginning of year 10.45 10.30 10.24
--------------------------
Net investment income .54 .57 .47
Net realized and unrealized gains (losses) (.38) .16 .07
--------------------------
Total from investment operations .16 .73 .54
--------------------------
Less distributions from net investment income (.51) (.58) (.48)
--------------------------
Net asset value, end of year 10.10 10.45 10.30
==========================
Total return (%) 3 1.62 7.38 5.45
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 1,367 3,644 385
Ratios to average net assets: (%)
Expenses .69 .69 .70 4
Net investment income 5.26 5.28 5.35 4
Portfolio turnover rate (%) 64.26 37.70 40.56
1. Based on average shares outstanding.
2. For the period January 2, 1997 (effective date) to October 31, 1997.
3. Totalreturn is not annualized.
4. Annualized.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The Global Fund intends to pay a dividend
at least monthly representing its net investment income. Capital gains, if any,
may be distributed annually. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that if
you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN(R).
The Short-Intermediate Fund declares dividends daily from its net investment
income and pays them monthly on or about the last day of the month. Your account
may begin to receive dividends on the day after we receive your investment and
will continue to receive dividends through the day we receive a request to sell
your shares. Capital gains, if any, may be distributed annually. The amount of
these distributions will vary and there is no guarantee the fund will pay
dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gains distribution from its net asset value, you will receive
some of your investment back in the form of a taxable distribution.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the fund to do so.
[End callout]
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains a fund distributes are taxable to you as long-term capital gains no matter
how long you have owned your shares.
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Any foreign taxes the Global Fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax advisor about the federal, state, local or foreign tax
consequences of your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the funds.
o Qualified registered investment advisors with clients invested in any series
of Franklin Mutual Series Fund Inc. on October 31, 1996, or who buy through a
broker-dealer or service agent who has an agreement with Franklin Templeton
Distributors, Inc. (Distributors). Minimum investments:$1,000 initial and $50
additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating in
comprehensive fee programs. Minimum investments: $250,000 initial ($100,000
initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial ($50
for accounts with an automatic investment plan) and $50 additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class or
Class Z shares of any of the Franklin Templeton Funds and $50 additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section 401
of the Internal Revenue Code, including salary reduction plans qualified
under section 401(k) of the Internal Revenue Code, and that are sponsored by
an employer (i) with at least 10,000 employees, or (ii) with retirement plan
assets of $100 million or more. Minimum investments: No initial or additional
minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum, as
long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds. There are certain other
requirements and the group must have a purpose other than buying fund
shares without a sales charge.
Please note that Advisor Class shares of the funds generally are not available
to retirement plans through Franklin Templeton's ValuSelect(R) program.
Retirement plans in the ValuSelect program before January 1, 1998, however, may
invest in the funds' Advisor Class shares.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
================================================================================
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment Contact your
shaking] THROUGH YOUR representative investment
INVESTMENT REPRESENTATIVE representative
- --------------------------------------------------------------------------------
[Insert graphic of envelope] Make your check payable Make your check
BY MAIL to the fund. payable to the fund.
Include your account
number on the check.
Mail the check and your Fill out the deposit
signed application to slip from your
Investor Services. account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note
to Investor Services.
- --------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a
lightning bolts] BY WIRE control number and wire wire control number
instructions. and wire instructions.
1-800/632-2301 (or Wire the funds and mail To make a same day
1-650/312-2000 collect) your signed application wire investment,
to Investor Services. please call us by
Please include the wire 1:00 p.m. Pacific
control number or your time and make sure
new account number on your wire arrives by
the application. 3:00 p.m.
To make a same day wire
investment, please call
us by 1:00 p.m. Pacific
time and make sure your
wire arrives by 3:00
p.m.
- --------------------------------------------------------------------------------
[Insert graphic of two arrows Call Shareholder Call Shareholder
pointing in opposite Services at the number Services at the
directions] BY EXCHANGE below, or send signed number below, or send
written instructions. signed written
instructions.
(Please see page 26 for Please see page 26
information on for information on
exchanges.) exchanges.)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
a fund by automatically transferring money from your checking or savings account
each month to buy shares. To sign up, complete the appropriate section of your
account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund in
an existing account in the same share class of the fund or in Advisor Class or
Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial sales
charges and contingent deferred sales charges (CDSCs) will not apply if you
reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class. You also may exchange your Advisor Class shares for Class
A shares of a fund that does not currently offer an Advisor Class (without any
sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust or Templeton Foreign Fund, you also may exchange your shares for
Class A shares of those funds (without any sales charge)* or for shares of
Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
31).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares if you otherwise qualify to buy the fund's
Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the funds we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the funds
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
59 1/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
================================================================================
TO SELL SOME OR ALL OF YOUR SHARES
- --------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment representative
shaking] THROUGH YOUR
INVESTMENT REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] BY MAIL certificates (if you hold share certificates)to
Investor Services. Corporate, partnership or
trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- --------------------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000 or
BY PHONE less,you do not hold share certificates and you
have not changed your address by phone within
the last 15 days, you can sell your shares by
phone.
1-800/632-2301 A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make it
payable to another person.
- --------------------------------------------------------------------------------
[Insert graphic of three You can call or write to have redemption
lightning bolts] BY proceeds sent to a bank account. See the
ELECTRONIC FUNDS TRANSFER policies above for selling shares by mail or
(ACH) phone.
Before requesting to have redemption proceeds
sent to a bank account, please make sure we
have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, a voided check or savings
account deposit slip, and a signature guarantee
if the ownership of the bank and fund accounts
is different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to three
business days.
- --------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in opposite are considering.
directions] BY EXCHANGE
Call Shareholder Services at the number below,
or send signed written instructions. See the
policies above for selling shares by mail or
phone.
If you hold share certificates, you will need
to return them to the fund before your exchange
can be processed.
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). The NAV for Advisor Class is calculated by
dividing its net assets by the number of its shares outstanding.
Each fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee accounts) because you sell some of your shares, we may mail you a
notice asking you to bring the account back up to its applicable minimum
investment amount. If you choose not to do so within 30 days, we may close your
account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the funds' financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the funds' transfer agent. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged shares
out of the fund more than twice in a calendar quarter, or (iii) exchanged shares
equal to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or lower
their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer would
be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
================================================================================
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: publicinfo(R)sec.gov.
Investment Company Act file #811-4986 FIST1 PA 03/00
FRANKLIN
INVESTORS
SECURITIES TRUST
INVESTMENT STRATEGY
INCOME
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN BOND FUND - CLASS A
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT
EACH FUND YOU SHOULD
KNOW BEFORE INVESTING
[End callout]
2 Franklin Adjustable U.S.
Government Securities Fund
11 Franklin Bond Fund
20 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT
SALES CHARGES, ACCOUNT
TRANSACTIONS AND SERVICES
[End callout]
22 Sales Charges
25 Buying Shares
27 Investor Services
30 Selling Shares
32 Account Policies
35 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE
ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN ADJUSTABLE U.S.
GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is to seek a high level of current income, while
providing lower volatility of principal than a fund that invests in fixed-rate
securities.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of its
assets in adjustable-rate mortgage securities (ARMS) and other mortgage
securities with interest rates that adjust periodically to reflect prevailing
market interest rates. The fund will only invest in mortgage securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
[Begin callout]
The fund normally invests at least 65% of its assets in ARMS and other
adjustable-rate mortgage securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities.
[End callout]
Mortgage securities represent an ownership in mortgage loans made by banks and
other financial institutions to finance purchases of homes, commercial buildings
and other real estate. The individual loans are packaged or "pooled" together
for sale to investors. As the underlying mortgage loans are paid off, investors
receive principal and interest payments. The mortgage securities purchased by
the fund include bonds and notes issued by the Federal Home Loan Banks, Federal
National Mortgage Association (FNMA), Government National Mortgage Association
(GNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Government agency or instrumentality issues have different levels of credit
support. GNMA securities are supported by the full faith and credit of the U.S.
government; FNMA securities are supported by its right to borrow from the U.S.
Treasury under certain circumstances; and FHLMC securities are supported only by
the credit of that instrumentality. The government (or government agency)
guarantee only applies to the timely repayment of principal and interest and not
to the market prices and yields of the securities or to the net asset value or
performance of the fund, which will vary with changes in interest rates and
other market conditions.
Interest rates on adjustable-rate securities generally are reset at intervals of
one year or less so that their rates gradually align themselves with market
interest rates. These periodic adjustments help keep the prices of these
securities relatively stable when compared with the prices of fixed-rate
securities, which generally fall when interest rates rise. As a result, the fund
may participate in increases in interest rates resulting in higher current
yields, but with less fluctuation in net asset value than a fund invested in
comparable fixed-rate securities. Adjustable-rate securities, however,
frequently limit the maximum amount by which the loan rate may change up or
down. The fund, therefore, may not benefit from increases in interest rates if
interest rates exceed a security's maximum allowable periodic or lifetime
limits. During periods of falling interest rates, the interest rates on these
securities may reset downward, resulting in a lower yield for the fund.
OTHER INVESTMENTS The fund may invest up to 35% of its net assets in other
securities, consistent with its goal, including fixed-rate mortgage securities.
The fund may also invest in direct obligations of the U.S. government, such as
Treasury bills, bonds or notes, and in repurchase agreements collateralized by
U.S. government or government agency securities. The fund also may purchase
collateralized mortgage obligations (CMOs).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities markets, the securities in which the fund normally
invests, or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these circumstances,
the fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in ARMS and other adjustable-rate securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE Because changes in interest rates on ARMS and other
adjustable-rate securities lag behind changes in market rates, the net asset
value of the fund may decline during periods of rising interest rates until the
interest rates on these securities reset to market rates. You could lose money
if you sell your shares of the fund before these rates reset.
If market interest rates increase substantially and the fund's adjustable-rate
securities are not able to reset to market interest rates during any one
adjustment period, the value of the fund's holdings and its net asset value may
decline until the rates are able to reset to market rates. In the event of a
dramatic increase in interest rates, the lifetime limit on a security's interest
rate may prevent the rate from adjusting to prevailing market rates. In such an
event the market value of the security could decline substantially and affect
the fund's net asset value.
To the extent the fund invests in non-mortgage debt securities it will be
subject to additional interest rate risks. When interest rates rise, debt
security prices fall. The opposite is also true: debt security prices rise when
interest rates fall. In general, securities with longer maturities are more
sensitive to these interest rate changes than securities with shorter
maturities.
Because the interest rates on adjustable-rate securities generally reset
downward when interest rates fall, their market value is unlikely to rise to the
same extent as the value of comparable fixed-rate securities during periods of
declining interest rates.
[Begin callout]
If interest rates rise, the net asset value of the fund may fall until the
interest rates on the fund's adjustable-rate securities reset to market rates.
If rates fall, mortgage holders may refinance their mortgage loans at lower
interest rates. This means you could lose money.
[End callout]
MORTGAGE SECURITIES Mortgage securities differ from conventional debt securities
because principal is paid back over the life of the security rather than at
maturity. The fund may receive unscheduled prepayments of principal before the
security's maturity date due to voluntary prepayments, refinancing or
foreclosure on the underlying mortgage loans. To the fund this means a loss of
anticipated interest, and a portion of its principal investment represented by
any premium the fund may have paid. Mortgage prepayments generally increase when
interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities and
extend their life. This could cause the price of the mortgage securities and the
fund's share price to fall and would make the mortgage securities more sensitive
to interest rate changes.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
MASTER/FEEDER STRUCTURE The fund seeks to achieve its investment goal by
investing all of its assets in shares of the U.S. Government Adjustable-Rate
Mortgage Portfolio (Portfolio). The Portfolio has the same investment goal and
substantially similar investment policies as the fund. The fund buys shares of
the Portfolio at net asset value. An investment in the fund is an indirect
investment in the Portfolio.
It is possible that the fund may have to withdraw its investment in the
Portfolio if the Portfolio changes its investment goal or if the fund's Board of
Trustees, at any time, considers it to be in the fund's best interest.
IF YOU ARE 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, its manager or its principal
underwriter on arbitrage rebate calculations.
[Insert graphic of bull and bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Begin callout]
Best
Quarter:
Q3 '91
2.73%
Worst
Quarter:
Q4 '94
- -1.40%
[End callout]
- ----------------------------------------------------------------------
9.53% 8.67% 4.01% 1.35% -1.96% 9.17% 6.25% 6.97% 3.87% 439%
90 91 92 93 94 95 96 97 98 99
- ----------------------------------------------------------------------
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 YEAR 5 YEARS 10 YEARS
Franklin Adjustable U.S. Government Securities Fund2 2.09% 5.63% 4.93%
Lehman Bros. Short U.S. Government 1-2 Years Index3 3.41% 6.28% 6.38%
- ------------------------------------------------------------------------------------
</TABLE>
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged Lehman Brothers Short U.S.
Government 1-2 Year Index includes U.S. government securities and treasuries
with maturities from one to two years. It includes reinvested interest. One
cannot invest directly in an index, nor is an index representative of the fund's
portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) as a percentage of offering price 2.25%
Load imposed on purchases 2.25%
Maximum deferred sales charge (load) None 1
Exchange fee2 $5.00
Please see "Sales Charges" on page 22 for an explanation of how and when these
sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)3
Management and administration fees 0.50%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.21%
--------
Total annual fund operating expenses 0.96%
========
1. Except for investments of $1 million or more (see page 22) and purchases by
certain retirement plans without an initial sales charge.
2. This fee is only for market timers (see page 33).
3. The annual fund operating expenses shown and included in the example below
reflect the expenses of both the fund and the Portfolio.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
$321 1 $524 $744 $1,377
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the Portfolio's investment manager and the fund's administrator.
Together, Advisers and its affiliates manage over $235 billion in assets.
The team responsible for the Portfolio's management is:
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1989.
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager on the fund since 1991. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1991 and has more than 30 years'
experience in the securities industry.
The Portfolio pays Advisers a fee for managing the Portfolio's assets. For the
fiscal year ended October 31, 1999, the fund's share of the Portfolio's
management fees was 0.40% of the fund's average daily net assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 9.36 9.48 9.37 9.34 9.20
-----------------------------------------------
Net investment income .45 .51 .55 .56 .54
Net realized and unrealized
gains (losses) (.06) (.12) .10 .03 .14
Total from investment operations .39 .39 .65 .59 .68
Less distributions from net
investment income (.45) (.51) (.54) (.56) (.54)
-----------------------------------------------
Net asset value, end of year 9.30 9.36 9.48 9.37 9.34
===============================================
Total return (%)2 4.24 4.26 7.18 6.54 7.57
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 282,685 298,298 334,990 397,078 509,371
Ratios to average net assets: (%)
Expenses3 .96 .76 .75 .69 .61
Expenses excluding waiver
and payments by affiliate3 .96 .93 .93 .86 .86
Net investment income 4.80 5.38 5.81 5.87 5.76
Portfolio turnover rates4 (%) 23.23 38.92 20.84 24.63 20.16
</TABLE>
1. Based on average shares outstanding
2. Total return does not include sales charges, and is not annualized.
3. Includes the fund's share of the Portfolio's allocated expenses.
4. Represents the Portfolio's rate of turnover.
FRANKLIN BOND FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is to provide high current income,
consistent with preservation of capital. Its secondary goal is capital
appreciation over the long term.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of its
assets in investment grade debt securities. The fund focuses on government and
corporate debt securities and mortgage and asset-backed securities.
Debt securities represent the obligation of the issuer to repay a loan of money
to it, and generally pay interest to the holder. Bonds, notes and debentures are
examples of debt securities. The mortgage securities purchased by the fund are
generally issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
[Begin callout]
The fund invests primarily in investment grade debt securities from various
market sectors that include government and corporate debt securities and
mortgage and asset-backed securities. [End callout]
Mortgage securities represent an ownership interest in mortgage loans made by
banks and other financial institutions to finance purchases of homes, commercial
buildings and other real estate. The individual loans are packaged or "pooled"
together for sale to investors. As the underlying mortgage loans are paid off,
investors receive principal and interest payments. The fund can invest in
adjustable-rate mortgage securities (based on mortgage loans with adjustable
interest rates) and fixed-rate mortgage securities (based on mortgage loans with
fixed interest rates).
The payment of interest and principal on mortgage securities issued by U.S.
government agencies generally is guaranteed either by the full faith and credit
of the U.S. government or by the credit of the government agency. The guarantee
applies only to the timely repayment of principal and interest and not to the
market prices and yields of the securities or to the net asset value or
performance of the fund, which will vary with changes in interest rates and
other market conditions.
Asset-backed securities are securities backed by credit card receivables,
automobile, mobile home and recreational vehicle loans and leases, and other
receivables.
Securities rated in the top four ratings categories by independent rating
organizations such as Standard & Poor's Ratings Group (S&P(R)) and Moody's
Investors Service, Inc. (Moody's) are considered "investment grade." The fund
generally invests in investment grade securities or in unrated securities the
fund's manager determines are comparable. The fund may invest up to 35% of total
assets in non-investment grade debt securities, but will not invest in
securities rated lower than B by S&P(R) or Moody's. The fund's focus on the
credit quality of its portfolio is intended to reduce credit risk and help to
preserve the fund's capital.
In choosing investments, the fund's manager selects securities in various market
sectors based on the manager's assessment of changing economic, market, industry
and issuer conditions. The manager uses a "top-down" analysis of macroeconomic
trends, combined with a "bottom-up" fundamental analysis of market sectors,
industries and issuers to try to take advantage of varying sector reactions to
economic events. The manager evaluates business cycles, changes in yield curves
and apparent imbalances in values between and within markets. These factors can
impact both income and potential for capital appreciation.
OTHER INVESTMENTS In order to effectively manage cash flows in or out of the
fund, the fund may buy and sell financial futures contracts or options on such
contracts. A financial futures contract is an agreement to buy or sell a
specific security or securities at a specified future date and price. The fund
uses futures contracts on U.S. Treasury securities to quickly and efficiently
cause new cash to be invested in the securities markets or, if cash will be
needed to meet shareholder redemption requests, to remove fund assets from
exposure to the market. The fund does not expect the value of its futures
investments to be more than 10% of its total assets.
The fund currently intends to limit its investments in foreign securities to 10%
or less of its total assets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities markets, the securities in which the fund normally
invests, or the economies of countries where the fund invests are experiencing
excessive volatility or a prolonged general decline, or other adverse conditions
exist. Under these circumstances, the fund may be unable to pursue its
investment goals, because it may not invest or may invest less in investment
grade debt securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities are more sensitive to interest rate changes
than securities with shorter maturities. Increases in interest rates may also
have a negative affect on the types of companies in which the fund invests
because these companies may find it more difficult to obtain credit to expand,
or may have more difficulty meeting interest payments.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of all the fund's debt securities will fall and so too
will the fund's share price. This means you could lose money. [End callout]
CREDIT Credit risk is the possibility that an issuer of a debt security, or the
borrower on the underlying mortgage or debt obligation, may be unable to make
interest payments or repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value and, thus, impact
fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Companies issuing high yield, debt securities are not as strong financially as
those issuing securities with higher credit ratings. These companies are more
likely to encounter financial difficulties and are more vulnerable to changes in
the economy, such as a recession or a sustained period of rising interest rates,
that could affect their ability to make interest and principal payments. If an
issuer stops making interest and/or principal payments, these securities may be
worthless and the fund could lose its entire investment.
The prices of high yield, debt securities fluctuate more than higher-quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by rating agencies.
Prices often are closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors.
High yield securities generally are less liquid than higher-quality securities.
Many of these securities do not trade frequently, and when they do their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Mortgage securities differ from
conventional debt securities because principal is paid back over the life of the
security rather than at maturity. The fund may receive unscheduled prepayments
of principal before the security's maturity date due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage loans. To the fund this
means a loss of anticipated interest, and a portion of its principal investment
represented by any premium the fund may have paid. Mortgage prepayments
generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities and
extend their life. This could cause the price of the mortgage securities and the
fund's share price to fall and would make the mortgage securities more sensitive
to interest rate changes.
Issuers of asset-backed securities may have a limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided to
support the securities, if any, may be inadequate to protect investors in the
event of default. Like mortgage securities, asset-backed securities are subject
to prepayment and extension risks.
DERIVATIVE SECURITIES Futures and options contracts are considered derivative
investments since their value depends on the value of the underlying asset to be
purchased or sold. The fund's investment in derivatives may involve a small
investment relative to the amount of risk assumed. Some derivatives are
particularly sensitive to changes in interest rates.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
additional risks that can increase the potential for losses in the fund. These
include country risks (due to general securities market movements in any country
where the fund has investments), company risks (due to less stringent
disclosure, accounting, auditing and financial reporting standards and
practices; less liquid securities; and less government supervision and
regulation of foreign markets and their participants), and currency risks (due
to fluctuations in currency exchange rates and the introduction of the euro).
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the issuers or companies in which it invests were adversely affected by Year
2000 computer-related problems. However, Year 2000 problems could still emerge.
If a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may have
an adverse effect on the fund's performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This information gives some indication of the risks of investing in the fund by
comparing the fund's performance with a broad-based securities market index. Of
course, past performance cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Begin callout]
Best
Quarter:
Q4 '99
0.79%
Worst
Quarter:
Q2 '99
- -1.38%
[End callout]
--------------------
-0.90%
99
--------------------
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 10/31/98
- -------------------------------------------------------------------------------
Franklin Bond Fund - Class A2 -5.08% -0.40%
Salomon Brothers Broad Investment Grade Index3 -0.83% 2.46%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged Salomon Brothers Broad
Investment Grade Index represents the universe of taxable fixed-income
investments. It includes U.S. government and agency issues, investment grade
corporate issues, mortgage-backed securities and Yankee bonds. It does not
include flower bonds or collateralized mortgage obligations (CMOs). All issues
have remaining maturities of one year or more and outstanding face values of at
least $25 million. About half of the issues are U.S. Treasury or agency issues
and the rest are divided among corporate and mortgage issues. The index includes
reinvested interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A
- ---------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering price 4.25%
Load imposed on purchases 4.25%
Maximum deferred sales charge (load) None1
Exchange fee2 $5.00
Please see "Sales Charges" on page 22 for an explanation of how and when these
sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A
- ---------------------------------------------------------------------------
Management fees3 0.43%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.50%
-------
Total annual fund operating expenses3 1.18%
=======
1. Except for investments of $1 million or more (see page 22) and purchases by
certain retirement plans without an initial sales charge.
2. This fee is only for market timers (see page 33).
3. For the fiscal year ended October 31, 1999, the manager and administrator had
agreed in advance to waive their respective fees and to assume as their own
expense certain expenses otherwise payable by the fund. With this reduction,
management fees and total annual fund operating expenses were 0.50%. After
October 31, 2000, the manager and administrator may end this arrangement at any
time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------
CLASS A $540 1 $784 $1,046 $1,796
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (Investment
Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394, through its
Templeton Global Bond Managers division (Global Bond Managers), is the fund's
sub-adviser. A team from Global Bond Managers provides Advisers with investment
management advice and assistance.
The team responsible for the fund's management is:
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1998 and has more than 30 years'
experience in the securities industry.
THOMAS J. DICKSON, VICE PRESIDENT OF GLOBAL BOND MANAGERS
Mr. Dickson has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal year
ended October 31, 1999, management fees, before any advance waiver, were 0.43%
of the fund's average daily net assets. Under an agreement by the manager to
waive its fees, the fund did not pay any management fees. After October 31,
2000, the manager may end this arrangement at any time upon notice to the fund's
Board of Trustees.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception. This
information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED
OCTOBER 31,
-------------------------
1999 1998 1
- --------------------------------------------------------------------------------
Per share data ($)2
Net asset value, beginning of year 10.37 10.00
-------------------------
Net investment income .63 .12
Net realized and unrealized gains (losses) (.71) .30
-------------------------
Total from investment operations (.08) .42
-------------------------
Less distributions from:
Net investment income (.63) (.05)
Net realized gains (.05) -
-------------------------
Total distributions (.68) (.05)
-------------------------
Net asset value, end of year 9.61 10.37
=========================
Total return (%)3 (.73) 4.05
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 7,870 4,232
Ratios to average net assets: (%)
Expenses .50 .50 4
Expenses excluding waiver and payments by affiliate 1.18 1.29 4
Net investment income 6.32 5.21 4
Portfolio turnover rate (%) 96.38 23.19
1. For the period August 3, 1998 (effective date) to October 31, 1998.
2. Based on average shares outstanding.
3. Total return does not include sales charges, and is not annualized.
4. Annualized
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The Adjustable U.S. Government Fund
intends to pay a dividend at least monthly, on or about the last day of the
month, representing its net investment income. Capital gains, if any, may be
distributed annually. The amount of these distributions will vary and there is
no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that if
you invest in the fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the fund's distributions, please call 1-800/DIAL BEN(R).
The Bond Fund declares dividends daily from the fund's net investment income and
pays them monthly on or about the last day of the month. Your account may begin
to receive dividends on the day after we receive your investment and will
continue to receive dividends through the day we receive a request to sell your
shares. Capital gains, if any, may be distributed annually. The amount of these
distributions will vary and there is no guarantee the fund will pay dividends.
Please keep in mind that if you invest in a fund shortly before the fund deducts
a capital gains distribution from its net asset value, you will receive some of
your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains a fund distributes are taxable to you as long-term capital gains no matter
how long you have owned your shares.
BACKUP WITHHOLDING
[Begin callout]
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the fund to do so. [End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Non-U.S. investors may be subject
to U.S. withholding and estate tax. You should consult your tax advisor about
the federal, state, local or foreign tax consequences of your investment in a
fund.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
THE SALES CHARGE MAKES
UP THIS % OF THE WHICH EQUALS THIS %
when you invest this amount OFFERING PRICE OF YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
ADJUSTABLE U.S. GOVERNMENT FUND
Under $100,000 2.25 2.30
$100,000 but under $250,000 1.75 1.78
$250,000 but under $500,000 1.25 1.26
$500,000 but under $1 million 1.00 1.01
BOND FUND
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 23), you can buy shares without an initial sales charge.
However, there is a 1% contingent deferred sales charge (CDSC) on any shares you
sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page 28
for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The funds have a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay distribution
fees of up to 0.25% per year to those who sell and distribute the fund's shares
and provide other services to shareholders. Because these fees are paid out of
the fund's assets on an on-going basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A or fund shares.
The Franklin Templeton Funds include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance Products
Trust, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
o Cumulative Quantity Discount - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o Letter of Intent (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE
APPROPRIATE SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
Certain Franklin Templeton Funds offer multiple share classes not offered by
Adjustable U.S. Government Fund. For purposes of this privilege, this fund's
shares are considered Class A shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days. The
CDSC also may be waived for certain redemptions and distributions. If you would
like information about available sales charge waivers, call your investment
representative or call Shareholder Services at 1-800/632-2301. For information
about retirement plans, you may call Retirement Plan Services at 1-800/527-2020.
A list of available sales charge waivers also may be found in the Statement of
Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INITIAL ADDITIONAL
- ----------------------------------------------------------------------------------------------
Regular accounts $1,000 $50
- ----------------------------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- ----------------------------------------------------------------------------------------------
Retirement accounts
(other than IRAs, IRA rollovers, Education IRAs or Roth IRAs) no minimum no minimum
- ----------------------------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth IRAs $250 $50
- ----------------------------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs $250 $50
- ----------------------------------------------------------------------------------------------
Full-time employees, officers, trustees and directors of Franklin Templeton
entities, and their immediate family members
$100 $50
- ----------------------------------------------------------------------------------------------
</TABLE>
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND
ELIGIBLE FOR SALE IN YOUR STATE OR JURISDICTION.
Certain Franklin Templeton Funds offer multiple share classes not offered by the
Adjustable U.S. Government Fund. Please note that for selling or exchanging your
shares, or for other purposes, this fund's shares are considered Class A shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Opening an account Adding to an account
- ------------------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment Contact your investment
shaking] Through your representative representative
investment
representative
- ------------------------------------------------------------------------------------------
[Insert graphic of envelope] By Make your check payable to Make your check payable to
Mail the fund. the fund. Include your
account number on the check.
Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- ------------------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] By Wire control number and wire control number and wire
instructions. instructions.
1-800/632-2301
(or 1-650/312-2000 collect) Wire the funds and mail your To make a same day wire
signed application to investment, please call us by
Investor Services. Please 1:00 p.m. Pacific time and
include the wire control make sure your wire arrives
number or your new account by 3:00 p.m.
number on the application.
To make a same day wire
investment, please call us
by 1:00 p.m. Pacific time and
make sure your wire arrives
by 3:00 p.m.
- ------------------------------------------------------------------------------------------
[Insert graphic of two arrows Call Shareholder Services at Call Shareholder Services at
pointing in opposite the number below, or send the number below or our
directions] signed written instructions. automated TeleFACTS system,
By Exchange The TeleFACTS system cannot or send signed written
be used to open a new account. instructions.
TeleFACTS(R)
1-800/247-1753 (Please see page 28 for (Please see page 28 for
(around-the-clock access) information on exchanges.) information on exchanges.)
- ------------------------------------------------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES P.O BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
a fund by automatically transferring money from your checking or savings account
each month to buy shares. The minimum investment to open an account with an
automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in shares of
Adjustable U.S. Government Fund by transferring money from your paycheck to the
fund by electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund in
an existing account in the same share class of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An exchange is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into the funds without any sales charge. Advisor Class shareholders of another
Franklin Templeton Fund also may exchange into the Adjustable U.S. Government
Fund without any sales charge. Advisor Class shareholders who exchange their
shares for shares of the fund and later decide they would like to exchange into
another fund that offers Advisor Class may do so.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
33).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the funds we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the funds
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
59 1/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
Selling shares
- --------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
[Insert graphic of hands Contact your investment representative
shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed share
BY MAIL certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or
trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary signatures
and any additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s) and address
on the account, or otherwise according to your
written instructions.
- --------------------------------------------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000 or
BY PHONE less, you do not hold share certificates and you
have not changed your address by phone within the
last 15 days, you can sell your shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address
on the account. Written instructions, with a
signature guarantee, are required to send the
check to another address or to make it payable to
another person.
- --------------------------------------------------------------------------------
[Insert graphic of three You can call or write to have redemption proceeds
lightning bolts] BY sent to a bank account. See the policies above
ELECTRONIC FUNDS TRANSFER for selling shares by mail or phone.
(ACH)
Before requesting to have redemption proceeds
sent to a bank account, please make sure we have
your bank account information on file. If we do
not have this information, you will need to send
written instructions with your bank's name and
address, a voided check or savings account
deposit slip, and a signature guarantee if the
ownership of the bank and fund accounts is
different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to three
business days.
- --------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you are
arrows pointing in opposite considering.
directions] BY EXCHANGE
Call Shareholder Services at the number below or
our automated TeleFACTS system, or send signed
TeleFACTS(R) written instructions. See the policies above
1-800/247-1753 for selling shares by mail or phone.
around-the-clock access)
If you hold share certificates, you will need to
return them to the fund before your exchange can
be processed.
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). The fund's NAV is calculated by dividing its
net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
Franklin Bond Fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your shares
may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the funds' financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the funds' transfer agent. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged shares
out of the fund more than twice in a calendar quarter, or (iii) exchanged shares
equal to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
ADJUSTABLE U.S. GOVERNMENT FUND
- -----------------------------------------------------------------------
COMMISSION (%) -
Investment under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.00
$500,000 but under $1 million 0.85
$1 million or more up to 0.75 1
12b-1 fee to dealer 0.25
FRANKLIN BOND FUND CLASS A
- -----------------------------------------------------------------------
COMMISSION (%) -
Investment under $100,000 4.00
$100,000 but under $250,000 3.25
$250,000 but under $500,000 2.25
$500,000 but under $1 million 1.85
$1 million or more up to 0.75 1
12b-1 fee to dealer 0.25
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans1 and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: publicinfo(R)sec.gov.
PROSPECTUS
FRANKLIN BOND FUND
FRANKLIN INVESTORS SECURITIES TRUST
ADVISOR CLASS
INVESTMENT STRATEGY
INCOME
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE
FUND YOU SHOULD KNOW
BEFORE INVESTING
[End callout]
2 Goals and Strategies
4 Main Risks
7 Performance
8 Fees and Expenses
9 Management
10 Distributions and Taxes
11 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT
QUALIFIED INVESTORS,
ACCOUNT TRANSACTIONS
AND SERVICES
[End callout]
12 Qualified Investors
14 Buying Shares
15 Investor Services
17 Selling Shares
19 Account Policies
21 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE
ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is to provide high current income,
consistent with preservation of capital. Its secondary goal is capital
appreciation over the long term.
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 65% of its
assets in investment grade debt securities. The fund focuses on government and
corporate debt securities and mortgage and asset-backed securities.
Debt securities represent the obligation of the issuer to repay a loan of money
to it, and generally pay interest to the holder. Bonds, notes and debentures are
examples of debt securities. The mortgage securities purchased by the fund are
generally issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
[Begin callout]
The fund invests primarily in investment grade debt securities from various
market sectors that include government and corporate debt securities and
mortgage and asset-backed securities. [End callout]
Mortgage securities represent an ownership interest in mortgage loans made by
banks and other financial institutions to finance purchases of homes, commercial
buildings and other real estate. The individual loans are packaged or "pooled"
together for sale to investors. As the underlying mortgage loans are paid off,
investors receive principal and interest payments. The fund can invest in
adjustable-rate mortgage securities (based on mortgage loans with adjustable
interest rates) and fixed-rate mortgage securities (based on mortgage loans with
fixed interest rates).
The payment of interest and principal on mortgage securities issued by U.S.
government agencies generally is guaranteed either by the full faith and credit
of the U.S. government or by the credit of the government agency. The guarantee
applies only to the timely repayment of principal and interest and not to the
market prices and yields of the securities or to the net asset value or
performance of the fund, which will vary with changes in interest rates and
other market conditions.
Asset-backed securities are securities backed by credit card receivables,
automobile, mobile home and recreational vehicle loans and leases, and other
receivables.
Securities rated in the top four ratings categories by independent rating
organizations such as Standard & Poor's Ratings Group (S&P(R)) and Moody's
Investors Service, Inc. (Moody's) are considered "investment grade." The fund
generally invests in investment grade securities or in unrated securities the
fund's manager determines are comparable. The fund may invest up to 35% of total
assets in non-investment grade debt securities, but will not invest in
securities rated lower than B by S&P(R) or Moody's. The fund's focus on the
credit quality of its portfolio is intended to reduce credit risk and help to
preserve the fund's capital.
In choosing investments, the fund's manager selects securities in various market
sectors based on the manager's assessment of changing economic, market, industry
and issuer conditions. The manager uses a "top-down" analysis of macroeconomic
trends, combined with a "bottom-up" fundamental analysis of market sectors,
industries and issuers to try to take advantage of varying sector reactions to
economic events. The manager evaluates business cycles, changes in yield curves
and apparent imbalances in values between and within markets. These factors can
impact both income and potential for capital appreciation.
OTHER INVESTMENTS In order to effectively manage cash flows in or out of the
fund, the fund may buy and sell financial futures contracts or options on such
contracts. A financial futures contract is an agreement to buy or sell a
specific security or securities at a specified future date and price. The fund
uses futures contracts on U.S. Treasury securities to quickly and efficiently
cause new cash to be invested in the securities markets or, if cash will be
needed to meet shareholder redemption requests, to remove fund assets from
exposure to the market. The fund does not expect the value of its futures
investments to be more than 10% of its total assets.
The fund currently intends to limit its investments in foreign securities to 10%
or less of its total assets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities markets, the securities in which the fund normally
invests, or the economies of countries where the fund invests are experiencing
excessive volatility or a prolonged general decline, or other adverse conditions
exist. Under these circumstances, the fund may be unable to pursue its
investment goals, because it may not invest or may invest less in investment
grade debt securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities are more sensitive to interest rate changes
than securities with shorter maturities. Increases in interest rates may also
have a negative affect on the types of companies in which the fund invests
because these companies may find it more difficult to obtain credit to expand,
or may have more difficulty meeting interest payments.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of all the fund's debt securities will fall and so too
will the fund's share price. This means you could lose money.
[End callout]
CREDIT Credit risk is the possibility that an issuer of a debt security, or the
borrower on the underlying mortgage or debt obligation, may be unable to make
interest payments or repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value and, thus, impact
fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Companies issuing high yield, debt securities are not as strong financially as
those issuing securities with higher credit ratings. These companies are more
likely to encounter financial difficulties and are more vulnerable to changes in
the economy, such as a recession or a sustained period of rising interest rates,
that could affect their ability to make interest and principal payments. If an
issuer stops making interest and/or principal payments, these securities may be
worthless and the fund could lose its entire investment.
The prices of high yield, debt securities fluctuate more than higher-quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by rating agencies.
Prices often are closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors.
High yield securities generally are less liquid than higher-quality securities.
Many of these securities do not trade frequently, and when they do their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Mortgage securities differ from
conventional debt securities because principal is paid back over the life of the
security rather than at maturity. The fund may receive unscheduled prepayments
of principal before the security's maturity date due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage loans. To the fund this
means a loss of anticipated interest, and a portion of its principal investment
represented by any premium the fund may have paid. Mortgage prepayments
generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities and
extend their life. This could cause the price of the mortgage securities and the
fund's share price to fall and would make the mortgage securities more sensitive
to interest rate changes.
Issuers of asset-backed securities may have a limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided to
support the securities, if any, may be inadequate to protect investors in the
event of default. Like mortgage securities, asset-backed securities are subject
to prepayment and extension risks.
DERIVATIVE SECURITIES Futures and options contracts are considered derivative
investments since their value depends on the value of the underlying asset to be
purchased or sold. The fund's investment in derivatives may involve a small
investment relative to the amount of risk assumed. Some derivatives are
particularly sensitive to changes in interest rates.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
additional risks that can increase the potential for losses in the fund. These
include country risks (due to general securities market movements in any country
where the fund has investments), company risks (due to less stringent
disclosure, accounting, auditing and financial reporting standards and
practices; less liquid securities; and less government supervision and
regulation of foreign markets and their participants), and currency risks (due
to fluctuations in currency exchange rates and the introduction of the euro).
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the issuers or companies in which it invests were adversely affected by Year
2000 computer-related problems. However, Year 2000 problems could still emerge.
If a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may have
an adverse effect on the fund's performance.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Insert graphic of bull and bear] PERFORMANCE
This information gives some indication of the risks of investing in the fund by
comparing the fund's performance with a broad-based securities market index. Of
course, past performance cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS1
[Begin callout]
Best
Quarter:
Q4 '99
0.89%
Worst
Quarter:
Q2 '99
- -1.32%
[End callout]
---------------
-0.72%
99
---------------
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 8/3/98
- -----------------------------------------------------------------------
Franklin Bond Fund - Advisor Class1 -0.72% 2.96%
Salomon Brothers Broad Investment Grade Index2 -0.83% 2.46%
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged Salomon Brothers Broad
Investment Grade Index represents the universe of taxable fixed-income
investments. It includes U.S. government and agency issues, investment grade
corporate issues, mortgage-backed securities and Yankee bonds. It does not
include flower bonds or collateralized mortgage obligations (CMOs). All issues
have remaining maturities of one year or more and outstanding face values of at
least $25 million. About half of the issues are U.S. Treasury or agency issues
and the rest are divided among corporate and mortgage issues. The index includes
reinvested interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- --------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -----------------------------------------------------------------
Management fees2 0.43%
Distribution and service (12b-1) fees None
Other expenses 0.50%
Total annual fund operating expenses2 0.93%
1. This fee is only for market timers (see page 20).
2. For the fiscal year ended October 31, 1999, the manager and administrator had
agreed in advance to waive their respective fees and to assume as their own
expense certain expenses otherwise payable by the fund. With this reduction,
management fees and total annual fund operating expenses were 0.25%. After
October 31, 2000, the manager and administrator may end this arrangement at any
time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------
$95 $296 $515 $1,143
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (Investment
Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394, through its
Templeton Global Bond Managers division (Global Bond Managers), is the fund's
sub-adviser. A team from Global Bond Managers provides Advisers with investment
management advice and assistance.
The team responsible for the fund's management is:
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1998 and has more than 30
years' experience in the securities industry.
THOMAS J. DICKSON, VICE PRESIDENT OF GLOBAL BOND MANAGERS
Mr. Dickson has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
The fund pays Advisers a fee for managing the fund's assets. For the fiscal year
ended October 31, 1999, management fees, before any advance waiver, were 0.43%
of the fund's average daily net assets. Under an agreement by the manager to
waive its fees, the fund did not pay any management fees. After October 31,
2000, the manager may end this arrangement at any time upon notice to the fund's
Board of Trustees.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily from
its net investment income and pays them monthly on or about the last day of the
month. Your account may begin to receive dividends on the day after we receive
your investment and will continue to receive dividends through the day we
receive a request to sell your shares. Capital gains, if any, may be distributed
annually. The amount of these distributions will vary and there is no guarantee
the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gains distribution from its net asset value, you will receive
some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains the fund distributes are taxable to you as long-term capital gains no
matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------------
ADVISOR CLASS 1999 1998 1
- -----------------------------------------------------------------------
PER SHARE DATA ($)2
Net asset value, beginning of year 10.38 10.00
-----------------------
Net investment income .66 .12
Net realized and unrealized gains (losses) (.71) .31
-----------------------
Total from investment operations (.05) .43
Less distributions from:
Net investment income (.66) (.05)
Net realized gains (.05) -
-----------------------
Total distributions (.71) (.05)
-----------------------
Net asset value, end of year 9.62 10.38
=======================
Total return (%)3 (.46) 4.27
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 12,099 31,588
Ratios to average net assets: (%)
Expenses .25 .25 4
Expenses excluding waiver and payments by .93 1.04 4
affiliate
Net investment income 6.57 5.46 4
Portfolio turnover rate (%) 96.38 23.19
1. For the period August 3, 1998 (effective date) to October 31, 1998.
2. Based on average shares outstanding.
3. Total return is not annualized.
4. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors with clients invested in any
series of Franklin Mutual Series Fund Inc. on October 31, 1996, or who buy
through a broker-dealer or service agent who has an agreement with Franklin
Templeton Distributors, Inc. (Distributors). Minimum investments: $1,000
initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial ($50
for accounts with an automatic investment plan) and $50 additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments: No
initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section
401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $50 additional. For
minimum investment purposes, the group's investments are added together.
The group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as
$1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds. There are certain other requirements and the group must
have a purpose other than buying fund shares without a sales charge.
Please note that Advisor Class shares of the fund generally are not available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may invest in
the fund's Advisor Class shares.
[Insert graphic of paper with lines and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
Opening an account Adding to an account
- --------------------------------------------------------------------------------
[Insert graphic of hands Contact your investment Contact your investment
shaking] THROUGH YOUR representative representative
INVESTMENT REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Make your check payable Make your check payable
envelope] BY MAIL to Franklin Bond Fund. to Franklin Bond Fund.
Include your account
Mail the check and your number on the check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do not
have a slip, include a
note with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note to
Investor Services.
- --------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] BY WIRE control number and wire control number and wire
1-800/632-2301 instructions. instructions.
(or 1-650/312-2000
collect) Wire the funds and mail To make a same day wire
your signed application investment, please call
to Investor Services. us by 1:00 p.m. Pacific
Please include the wire time and make sure your
control number or your wire arrives by 3:00 p.m.
new account number on the
application.
To make a same day wire
investment, please call
us by 1:00 p.m. Pacific
time and make sure your
wire arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of two Call Shareholder Services Call Shareholder
arrows pointing in at the number below, or Services at the number
opposite directions] BY send signed written below, or send signed
EXCHANGE instructions. (Please see written instructions.
page 16 for information (Please see page 16 for
on exchanges.) information on
exchanges.)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class of the fund or in Advisor Class or
Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial sales
charges and contingent deferred sales charges (CDSCs) will not apply if you
reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class. You also may exchange your Advisor Class shares for Class
A shares of a fund that does not currently offer an Advisor Class (without any
sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust or Templeton Foreign Fund you also may exchange your shares for
Class A shares of those funds (without any sales charge)* or for shares of
Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
20).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares if you otherwise qualify to buy the fund's
Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
59 1/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
SELLING SHARES
To sell some or all of your shares
- --------------------------------------------------------------------------------
[Insert graphic of Contact your investment representative
hands shaking] THROUGH
YOUR INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] BY MAIL certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. Be sure to
include all necessary signatures and any additional
documents, as well as signature guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
- --------------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or less,
phone] you do not hold share certificates and you have not
BY PHONE changed your address by phone within the last 15 days,
you can sell your shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- --------------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption proceeds sent
three lightning bolts] to a bank account. See the policies above for selling
BY ELECTRONIC FUNDS shares by mail or phone.
TRANSFER (ACH)
Before requesting to have redemption proceeds sent to a
bank account, please make sure we have your bank
account information on file. If we do not have this
information, you will need to send written instructions
with your bank's name and address, a voided check or
savings account deposit slip, and a signature guarantee
if the ownership of the bank and fund accounts is
different.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
- --------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you are
arrows pointing in considering.
opposite directions]
BY EXCHANGE Call Shareholder Services at the number below, or send
signed written instructions. See the policies above
for selling shares by mail or phone.
If you hold share certificates, you will need to
return them to the fund before your exchange can be
processed.
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). The NAV for Advisor Class is calculated by
dividing its net assets by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee accounts) because you sell some of your shares, we may mail you a
notice asking you to bring the account back up to its applicable minimum
investment amount. If you choose not to do so within 30 days, we may close your
account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged shares
out of the fund more than twice in a calendar quarter, or (iii) exchanged shares
equal to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days' notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer would
be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us at
P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
Hours (Pacific time,
Department Name Telephone Number Monday through Friday)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/ 342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/ 527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.
This page intentionally left blank.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at
http://www.sec.gov. You can obtain copies of this information, after paying a
duplicating fee, by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102 or by electronic request at the following E-mail
address: publicinfo(R)sec.gov.
Investment Company Act file #811-4986 FIST2 PA 03/00
FRANKLIN INVESTORS
SECURITIES TRUST
FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS A & C
FRANKLIN EQUITY INCOME FUND - CLASS A, B & C
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS A & C
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND - CLASS A
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
- ------------------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated March 1, 2000, which we may amend from time to
time, contains the basic information you should know before investing in a
fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies .......................................... 2
Risks ......................................................... 17
Officers and Trustees ......................................... 23
Management and Other Services ................................. 25
Portfolio Transactions ........................................ 27
Distributions and Taxes ....................................... 28
Organization, Voting Rights and
Principal Holders ............................................ 30
Buying and Selling Shares ..................................... 31
Pricing Shares ................................................ 37
The Underwriter ............................................... 38
Performance ................................................... 40
Miscellaneous Information ..................................... 43
Description of Ratings ........................................ 43
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
FIST1 SAI 03/00
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
The Convertible Fund's investment goal is to maximize total return,
consistent with reasonable risk, by seeking to optimize capital appreciation
and high current income under varying market conditions.
The Equity Income Fund's investment goal is to maximize total return by
emphasizing high current income and long-term capital appreciation,
consistent with reasonable risk.
The Global Fund's investment goal is to provide high current income,
consistent with preservation of capital, with capital appreciation as a
secondary consideration.
The Short-Intermediate Fund's investment goal is to provide as high a level
of current income as is consistent with prudent investing, while seeking
preservation of shareholders' capital.
These goals are fundamental, which means they may not be changed without
shareholder approval.
CONVERTIBLE FUND
The fund pursues its investment goal by investing at least 65% of its net
assets (except when maintaining a temporary defensive position) in a
diversified portfolio of convertible securities as described below, and
common stock received upon conversion or exchange of such securities and
retained in the fund's portfolio to permit their orderly disposition. The
fund's policies permit investment in convertible and fixed-income securities
without restrictions as to a specified range of maturities.
The fund may invest up to 35% of its net assets in other securities
(non-convertible equity securities and corporate bonds, covered call options
and put options, securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, repurchase agreements collateralized by U.S.
government securities, money market securities, and securities of foreign
issuers), which, in the aggregate, the fund considers to be consistent with
its investment objective. The fund limits its investments in warrants, valued
at the lower of cost or market, to 5% of the fund's net assets, or to
warrants attached to securities.
The fund will not invest more than 25% of its net assets in any particular
industry. This limitation does not apply to U.S. government securities and
repurchase agreements secured by such government securities or obligations.
EQUITY FUND
The fund pursues its investment goal by investing at least 65% of its net assets
(except when maintaining a temporary defensive position) in a broadly
diversified portfolio of common stocks offering current dividend yields above
the average of the market defined by the Standard & Poor's(R) 500 Index ("S&P(R)
500"). The fund may invest up to 30% of its assets in foreign securities,
including depositary receipts and emerging markets, but currently intends to
limit such investments to 20% (no more than 10% in emerging markets). The fund
may invest up to 35% of its net assets in other securities that, in the
aggregate, it considers to be consistent with its investment objective. Other
investments may include common stocks with current dividend yields at or below
the S&P(R) 500, preferred stocks and fixed-income securities convertible into
common stocks, real estate investment trusts (REITs), U.S. government
securities, corporate bonds, high grade commercial paper, bankers' acceptances,
other short-term instruments, covered call options, and put options.
The fund's emphasis on a stock's current dividend yield is based upon the
investment philosophy that dividend income is generally a significant
contributor to the returns available from investing in stocks over the long term
and that dividend income is often more consistent than capital appreciation as a
source of investment return. Moreover, the price volatility of stocks with
relatively higher dividend yields tends to be less than stocks that pay out
little dividend income, affording the fund the potential for greater principal
stability.
Because high relative dividend yield as defined above is frequently
accompanied by a lower stock price, the fund seeks to buy a stock when its
relative dividend yield is high. Conversely, it seeks to sell a stock when
its dividend yield is low relative to its history, which may be caused by an
increase in the price of the stock. The fund may then reinvest the proceeds
into other relatively high dividend yielding issues. This approach may allow
the fund to take advantage of capital appreciation opportunities presented by
quality stocks that are temporarily out of favor with the market and that are
subsequently "rediscovered."
In addition to offering above-average yields, securities selected for
investment by this strategy may provide some of the following characteristics
consistent with the fund's fundamental goal: above-average dividend growth
prospects, low price to normalized earnings (projected earnings under normal
operating conditions), low price to cash flow, low price to book value,
and/or low price to realizable liquidation value.
The fund's current investment strategy is not a fundamental policy of the
fund and is subject to change at the discretion of the board of trustees and
without prior shareholder approval.
GLOBAL FUND
The fund seeks to achieve its goal by investing at least 65% of its total
assets in securities issued or guaranteed by domestic and foreign governments
and their political subdivisions, including the U.S. government, its
agencies, and authorities or instrumentalities (U.S. government securities).
The fund considers securities issued by central banks that are guaranteed by
their national governments to be government securities.
The fund selects investments to provide a high current yield and currency
stability, or a combination of yield, capital appreciation, and currency
appreciation consistent with the fund's objective. The fund may also seek to
protect or enhance income, or protect capital, through the use of forward
currency exchange contracts, options, futures contracts, options on futures,
and interest rate swaps, all of which are generally considered "derivative
securities."
The fund will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its objective based upon relative interest rates among currencies, the
outlook for changes in these interest rates, and anticipated changes in
worldwide exchange rates. In considering these factors, the fund will
evaluate a country's economic and political conditions such as inflation
rate, growth prospects, global trade patterns, and government policies.
As a global fund, the fund may invest in securities issued in any currency
and may hold foreign currency. Securities of issuers within a given country
may be denominated in the currency of another country, or in multinational
currency units such as the euro or the European Currency Unit (ECU).
Under normal economic conditions, the fund invests at least 65% of its total
assets in fixed-income securities such as bonds, notes, and debentures. Some
of the fixed-income securities may be convertible into common stock or be
traded together with warrants for the purchase of common stocks, although the
fund has no current intention of converting such securities into equity or
holding them as equity upon such conversion. The remaining 35% may be
invested, to the extent available and permissible, in equity or debt
securities of non-governmental issuers, foreign or domestic currency
deposits, or cash equivalents such as short-term U.S. Treasury notes, or
repurchase agreements.
The fund may invest in debt securities with varying maturities. Under current
market conditions, it is expected that the dollar-weighted average maturity
of the fund's investments will not exceed 15 years. Generally, the
portfolio's average maturity will be shorter when the manager expects
interests rates worldwide or in a particular country to rise, and longer when
the manager expects interest rates to fall.
The fund may also invest in other fixed-income securities of both domestic
and foreign issuers including preferred and preference stock and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment trust certificates,
and conditional sales contracts. These fixed-income securities may involve
equity features, such as conversion or exchange rights or warrants for the
acquisition of stock of the same or a different issuer; participation based
on revenues, sales, or profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common stock are offered
as a unit). The fund will limit its investments in warrants, valued at the
lower of cost or market, to 5% of the fund's net assets or to warrants
attached to securities.
The fund may also invest in debt securities of supranational entities
denominated in any currency. A supranational entity is an entity designated
or supported by the national government of one or more countries to promote
economic reconstruction or development. Examples of supranational entities
include, among others, the World Bank, the European Investment Bank, and the
Asian Development Bank. The fund may, in addition, invest in debt securities
denominated in multinational currencies of issuers in any country (including
supranational issuers). The fund is further authorized to invest in
"semi-governmental securities," which are debt securities issued by entities
owned by either a national, state, or equivalent government or are
obligations of a government jurisdiction that are not backed by its full
faith and credit and general taxing powers. U.S. rating agencies do not rate
many debt obligations of foreign issuers, especially developing market
issuers, and their selection for the fund depends on the manager's internal
analysis.
SHORT-INTERMEDIATE FUND
The fund intends to invest up to 100% of its net assets in U.S. government
securities and, as a fundamental policy, the fund must invest at least 65% of
its net assets in U.S. government securities.
Government securities are 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 (FNMA), Government National Mortgage Association (GNMA),
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 (FHLMC), or National Credit Union Administration.
The fund may purchase certain U.S. government securities at a discount. These
securities, when held to maturity or retired, may include an element of
capital gain. The fund does not intend to hold securities for the purpose of
achieving capital gains, but will generally hold them as long as current
yields on these securities remain attractive. The fund may realize capital
losses when securities purchased at a premium are held to maturity or are
called or redeemed at a price lower than their purchase price. The fund may
also realize capital gains or losses upon the sale of securities.
MATURITY The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence
the average life of the certificates, will be a function of the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions. Such prepayments are
passed through to the registered holder with the regular monthly payments of
principal and interest and have the effect of reducing future payments.
Similarly, the average life of callable securities will be a function of
their stated maturities, call dates, and the level of interest rates.
Estimated average life will be determined by the fund's manager and used for
the purpose of determining the average weighted maturity of the fund.
CONCENTRATION The fund will not invest more than 25% of the value of its total
assets in any one particular industry.
Below is additional information about the various securities the funds may buy.
EQUITY SECURITIES Equity securities generally entitle the holder to participate
in a company's general operating results. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock, as
well as securities convertible into common stocks. Preferred stockholders
typically receive priority in the distribution of dividends over common
stockholders but may receive less appreciation than common stockholders.
Preferred stockholders may also have greater voting rights as to certain issues
as well. Equity securities may also include convertible securities, warrants, or
rights. Warrants or rights give the holder the right to buy a common stock at a
given time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in each fund's net asset value per share.
Independent rating organizations rate debt and convertible securities based
upon their assessment of the financial soundness of the issuer. Generally, a
lower rating indicates higher risk. Below investment grade securities are
generally those rated Ba or lower by Moody's Investors Service, Inc.
(Moody's) or BB or lower by Standard & Poor's Ratings Group (S&P(R)). Please
see Description of Bond Ratings.
Higher yields are ordinarily available from securities in the lower-rated
categories or from unrated securities of comparable quality. Convertible
securities generally fall within the lower-rated categories of rating agencies
(i.e., securities rated Baa or lower by Moody's or BBB or lower by S&P(R)). The
Convertible Fund will not invest more than 10% of its total assets in securities
rated below B by Moody's or S&P(R) or unrated securities of comparable quality.
The Equity Fund may only invest in securities that are rated at least B or above
by Moody's or S&P(R) or unrated securities of comparable quality. Securities
rated B and comparable unrated securities are regarded as speculative and may
involve greater risks as to the timely payment of interest or dividends,
including the risk of bankruptcy or default by the issuer.
The funds will not invest in securities the manager believes involve excessive
risk. If a ratings service changes the rating on a security a fund holds or the
security goes into default, the manager will consider that event in its
evaluation of the overall investment merits of the security but will not
necessarily sell the security.
The Equity Fund may invest up to a maximum of 35% of its net assets in debt
securities. In seeking securities that meet its investment objective, the
Equity Fund will buy only debt securities which are rated B or better by S&P(R)
or Moody's or debt securities that are unrated but that are judged to be of
comparable quality. The Equity Fund does not intend to invest more than 5% of
its assets in fixed-income securities rated below Baa by Moody's or BBB by
S&P(R).
Ratings, which represent the opinions of the rating services with respect to
the securities and are not absolute standards of quality, will be considered
in connection with the investment of the funds' assets but will not be a
determining or limiting factor. In its investment analysis of securities
being considered for a fund's portfolio, rather than relying principally on
the ratings assigned by rating services, the manager may also consider, among
other things, relative values based on such factors as anticipated cash flow,
interest coverage, asset coverage, earnings prospects, the experience and
managerial strength of the issuer, responsiveness to changes in interest
rates and business conditions, debt maturity schedules and borrowing
requirements, and the issuer's changing financial condition and public
recognition thereof.
OTHER FIXED-INCOME SECURITIES. The Global Fund may purchase fixed-income
securities of both domestic and foreign issuers including, among others,
preference stock and all types of long-term or short-term debt obligations,
such as equipment trust certificates, equipment lease certificates, and
conditional sales contracts. Equipment-related instruments are used to
finance the acquisition of new equipment. The instrument gives the
bond-holder the first right to the equipment in the event that interest and
principal are not paid when due. Title to the equipment is held in the name
of the trustee, usually a bank, until the instrument is paid off.
Equipment-related instruments usually mature over a period of 10 to 15 years.
In practical effect, equipment trust certificates, equipment lease
certificates, and conditional sales contracts are substantially identical;
they differ mainly in legal structure. These fixed-income securities may
involve equity features, such as conversion or exchange rights or warrants
for the acquisition of stock of the same or a different issuer; participation
based on revenues, sales, or profits; or the purchase of common stock in a
unit transaction (where an issuer's debt securities and common stock are
offered as a unit).
FOREIGN SECURITIES The Convertible Fund and the Equity Fund will generally
buy foreign securities that are traded in the U.S. or buy sponsored or
unsponsored American Depositary Receipts (ADRs). Each fund may, however, buy
the securities of foreign issuers directly in foreign markets so long as, in
the manager's judgment, an established public trading market exists. The
Convertible Fund and the Equity Fund may invest up to 30% of net assets in
foreign securities not publicly traded in the U.S. The holding of foreign
securities may be limited by the Convertible Fund to avoid investment in
certain Passive Foreign Investment Companies (PFICs) 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 total assets in securities of developing markets.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents. A
fund does not consider any security that it acquires outside the U.S. and
that is publicly traded in the U.S., on a foreign securities exchange, or in
a foreign securities market to be illiquid so long as the fund acquires and
holds the security with the intention of re-selling the security in the
foreign trading market, the fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign
investments.
DEPOSITARY RECEIPTS. ADRs are typically issued by a U.S. bank or trust company
and evidence ownership of underlying securities issued by a foreign corporation.
Generally, depositary receipts in registered form are designed for use in the
U.S. securities market, and depositary receipts in bearer form are designed for
use in securities markets outside the U.S. Depositary receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below.
OBLIGATIONS OF DEVELOPING COUNTRIES. The Global Fund may invest in the
fixed-income obligations of governments, government agencies, and corporations
of developing countries. As of the date of this SAI, such opportunities are
limited as many developing countries are rescheduling their existing loans and
obligations. However, as restructuring is completed and economic conditions
improve, these obligations may become available at discounts and offer the
Global Fund the potential for current U.S. dollar income. These instruments are
not traded on any exchange. However, the manager believes there may be a market
for such securities either in multinational companies wishing to purchase such
assets at a discount for further investment, or from the issuing governments
which may decide to redeem their obligations at a discount.
CONVERTIBLE SECURITIES A convertible security is generally a debt obligation
or preferred stock that may be converted within a specified period of time
into a certain amount of common stock of the same or a different issuer. A
convertible security provides a fixed-income stream and the opportunity,
through its conversion feature, to participate in the capital appreciation
resulting from a market price advance in its underlying common stock. As with
a straight fixed-income security, a convertible security tends to increase in
market value when interest rates decline and decrease in value when interest
rates rise. Like a common stock, the value of a convertible security also
tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines.
Because both interest rate and market movements can influence its value, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as
its underlying stock.
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 each fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles,
a number of different structures have been created to fit the characteristics
of specific investors and issuers. Examples of these enhanced characteristics
for investors include yield enhancement, increased equity exposure or
enhanced downside protection. From an issuer's perspective, enhanced
structures are designed to meet balance sheet criteria, interest/dividend
payment deductibility and reduced equity dilution. The following are
descriptions of common structures of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS - each
issuer has a different acronym for their version of these securities) are
considered the most equity-like of convertible securities. At maturity these
securities are mandatorily convertible into common stock offering investors
some form of yield enhancement in return for some of the upside potential in
the form of a conversion premium. Typical characteristics of mandatories
include: issued as preferred stock, convertible at premium, pay fixed
quarterly dividend (typically higher than common stock dividend), and are
non-callable for the life of the security (usually three to five years). An
important feature of mandatories is that the number of shares received at
maturity is determined by the difference between the price of the common
stock at maturity and the price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPRS, and TECONS)
are, from an investor's viewpoint, essentially convertible preferred
securities, i.e., they are issued as preferred stock convertible into common
stock at a premium and pay quarterly dividends. Through this structure the
company establishes a wholly owned special purpose vehicle whose sole purpose
is to issue convertible preferred stock. The offering proceeds pass-through
to the company who issues the special purpose vehicle a convertible
subordinated debenture with identical terms to the convertible preferred
issued to investors. Benefits to the issuer include increased equity credit
from rating agencies and the deduction of coupon payments for tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into
common stock at maturity and offers investors a higher current dividend than
the underlying common stock. The difference between these structures and
other mandatories is that the participation in stock price appreciation is
capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest
is actually paid, the accrued interest may be deducted for tax purposes.
Because of their put options, these bonds tend to be less sensitive to
changes in interest rates than either long maturity bonds or preferred
stocks. The put options also provide enhanced downside protection while
retaining the equity participation characteristics of traditional convertible
bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. A fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary, to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio. The Convertible
Fund and the Equity Fund, however, intend to acquire liquid securities,
though there can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The Convertible Fund may invest a portion of its
assets in "synthetic convertible" securities. A synthetic convertible is
created by combining distinct securities which together possess the two
principal characteristics of a true convertible security, i.e., fixed income
and the right to acquire the underlying equity security. This combination is
achieved by investing in nonconvertible fixed-income securities and in
warrants or stock or stock index call options which grant the holder the
right to purchase a specified quantity of securities within a specified
period of time at a specified price or to receive cash in the case of stock
index options. Synthetic convertible securities are generally not considered
to be "equity securities" for purposes of the fund's investment policy
regarding those securities.
Synthetic convertible securities differ from true convertible securities in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the manager
expects normally to create synthetic convertibles whose two components
represent one issuer, the character of a synthetic convertible allows the
fund to combine components representing distinct issuers, or to combine a
fixed income security with a call option on a stock index, when the manager
determines that such a combination would better promote the fund's investment
objectives. In addition, the component parts of a synthetic convertible
security may be purchased simultaneously or separately; and the holder of a
synthetic convertible faces the risk that the price of the stock, or the
level of the market index underlying the convertibility component will
decline.
REAL ESTATE INVESTMENT TRUSTS (REITS) The Equity Fund may invest up to 15% of
its assets in REITs that are listed on a securities exchange or traded
over-the-counter and meet the fund's investment objective. The Convertible
Fund may invest in convertible securities of REITs. In order to qualify as a
REIT, a company must derive at least 75% of its gross income from real estate
sources (rents, mortgage interest, gains from the sale of real estate
assets), and at least 95% from real estate sources, plus dividends, interest,
and gains from the sale of securities. Real property, mortgage loans, cash,
and certain securities must comprise 75% of a company's assets. In order to
qualify as a REIT, a company must also make distributions to shareholders
aggregating annually at least 95% of its REIT taxable income.
BANK SECURITIES The Global Fund may invest in obligations of domestic and
foreign banks which, at the date of investment, have total assets (as of the
date of their most recently published financial statements) in excess of one
billion dollars (or foreign currency equivalent at then-current exchange
rates).
LOAN PARTICIPATIONS The Global Fund may acquire loan participations in which
the fund will buy from a lender a portion of a larger loan that the lender
has made to a borrower. Generally, loan participations are sold without
guarantee or recourse to the lending institution and are subject to the
credit risks of both the borrower and the lending institution. Loan
participations, however, may enable the fund to acquire an interest in a loan
from a financially strong borrower, which the fund could not do directly.
Loan participations may have speculative characteristics. The Global Fund may
purchase loan participations at par or which sell at a discount because of
the borrower's credit problems. To the extent the borrower's credit problems
are resolved, the loan participation may appreciate in value but not beyond
par value.
The Global Fund may acquire loan participations that sell at a discount, from
time to time, when it believes the investments offer the possibility of
long-term appreciation in value in addition to current income. An investment
in loan participations carries a high degree of risk and may have the
consequence that interest payments with respect to such securities may be
reduced, deferred, suspended, or eliminated and may have the further
consequence that principal payments may likewise be reduced, deferred,
suspended, or cancelled, causing the loss of the entire amount of the
investment. The Global Fund generally will acquire loans from a bank, finance
company, or other similar financial services entity (Lender).
Loan participations are interests in floating- or variable-rate senior loans
(Loans) to U.S. corporations, partnerships, and other entities (Borrowers).
The Loans typically have the most senior position in a Borrower's capital
structure, although some Loans may hold an equal ranking with other senior
securities of the Borrower. Although the Loans generally are secured by
specific collateral, the Global Fund may invest in Loans that are not secured
by any collateral. Uncollateralized Loans pose a greater risk of nonpayment
of interest or loss of principal than do collateralized Loans. The collateral
underlying a collateralized Loan may consist of assets that may not be
readily liquidated, and there is no assurance that the liquidation of such
assets would fully satisfy a Borrower's obligation under a Loan. The Global
Fund is not subject to any restrictions with respect to the maturity of the
Loans in which it purchases participation interests.
Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the manager may consider ratings in determining whether
to invest in a particular Loan, such ratings will not be the determinative
factor in the manager's analysis.
Loans are not readily marketable and may be subject to restrictions on
resale. Any secondary purchases and sales of loan participations generally
are conducted in private transactions between buyers and sellers.
When acquiring a loan participation, the Global Fund will have a contractual
relationship only with the Lender (typically an entity in the banking,
finance, or financial services industries), not with the Borrower. The Global
Fund has the right to receive payments of principal and interest to which it
is entitled only from the Lender selling the loan participation and only upon
receipt by the Lender of payments from the Borrower. In connection with
purchasing loan participations, the Global Fund generally will have no right
to enforce compliance by the Borrower with the terms of the Loan Agreement,
nor any rights with respect to any funds acquired by other Lenders through
set-off against the Borrower, and the Fund may not directly benefit from the
collateral supporting the Loan in which it has purchased the loan
participation. As a result, the Global Fund may assume the credit risk of
both the Borrower and the Lender selling the loan participation. In the event
of the insolvency of the Lender selling a loan participation, the Global Fund
may be treated as a general creditor of the Lender, and may not benefit from
any set-off between the Lender and the Borrower.
U.S. GOVERNMENT SECURITIES The funds may invest in U.S. government
securities. U.S. government securities include U.S. Treasury obligations and
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, such as GNMA, which carries a guarantee backed by the full
faith and credit of the U.S. Treasury. GNMA may borrow from the U.S. Treasury
to the extent needed to make payments under its guarantee. No assurances can
be given, however, that the U.S. government will provide financial support to
the obligations of the other U.S. government agencies or instrumentalities in
which the funds may invest, since it is not obligated to do so. These
agencies and instrumentalities are supported by the issuer's right to borrow
an amount limited to a specific line of credit from the U.S. Treasury, the
discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality, or the credit of the agency or
instrumentality.
U.S. government securities do not generally involve the credit risks
associated with other types of interest-bearing securities, and, as a result,
the yields available from such securities are generally lower than the yields
available from other types of interest-bearing securities. Like all
interest-bearing securities, however, the market values of U.S. government
securities change as interest rates fluctuate. In addition, the mortgages
underlying GNMAs are subject to repayment prior to maturity, and in times of
falling mortgage interest rates premature repayments may be more likely. To
the extent GNMAs held by a 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.
CALLABLE SECURITIES These structures give the issuer
the right to redeem the security on a given date or dates (known as the call
dates) prior to maturity. In return, these securities typically offer a
higher yield. The period of call protection between the time of issue and the
first call date varies from security to security. Documentation for callable
securities usually requires that investors be notified of a call within a
prescribed period of time.
Issuers typically exercise call options in periods of declining interest
rates, thereby creating reinvestment risk for the investor. On the other
hand, if an investor expects a security to be called and it is not, the
investor faces an effective maturity extension. Certain securities may be
called only in whole (the entire security is redeemed), while others may be
called in part (a portion of the total face value is redeemed) and possibly
from time to time as determined by the issuer.
MORTGAGE SECURITIES Mortgage securities represent an ownership interest in
mortgage loans made by banks and other financial institutions to finance
purchases of homes, commercial buildings or other real estate. These mortgage
loans may have either fixed or adjustable interest rates. The individual
mortgage loans are packaged or "pooled" together for sale to investors. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments.
A mortgage-backed security is an interest in a pool of mortgage loans. The
primary issuers or guarantors of these securities are GNMA, FNMA and FHLMC.
GNMA creates mortgage-backed securities from pools of government guaranteed
or insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks, and savings and loan
associations. FNMA and FHLMC issue mortgage securities from pools of
conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including savings and loan associations,
savings banks, commercial banks, credit unions, and mortgage bankers. The
principal and interest on GNMA securities are guaranteed by GNMA and backed
by the full faith and credit of the U.S. government. Mortgage securities from
FNMA and FHLMC are not backed by the full faith and credit of the U.S.
government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and the ultimate
collection of principal. Securities issued by FNMA are supported by the
agency's right to borrow money from the U.S. Treasury under certain
circumstances. Securities issued by FHLMC are supported only by the credit of
the agency. There is no guarantee that the government would support
government agency securities and, accordingly, they may involve a risk of
non-payment of principal and interest. Nonetheless, because FNMA and FHLMC
are instrumentalities of the U.S. government, these securities are generally
considered to be high quality investments having minimal credit risks. 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.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly payments consisting of a pro rata share
of both regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool (less GNMA's, FHLMC's, or FNMA's
fees and any applicable loan servicing fees).
Guarantees as to the timely payment of principal and interest do not extend
to the value or yield of mortgage-backed securities nor do they extend to the
value of the fund's shares. In general, the value of fixed-income securities
varies with changes in market interest rates. Fixed-rate mortgage securities
generally decline in value during periods of rising interest rates, whereas
coupon rates of adjustable rate mortgage securities move with market interest
rates, and thus their value tends to fluctuate to
a lesser degree. In view of these factors, the ability of a fund to obtain a
high level of total return may be limited under varying market conditions.
ZERO COUPON BONDS The Short-Intermediate Fund may invest in zero coupon bonds
issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Zero coupon bonds are debt obligations that are issued at
a significant discount from face value. The original discount approximates
the total amount of interest the bonds will accrue and compounds over the
period until maturity or the first interest accrual date at a rate of
interest reflecting the market rate of the security at the time of issuance.
The fund will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the fund's distribution
obligations.
CASH MANAGEMENT To the extent the funds' manager believes it to be desirable
or expedient under then-existing market conditions, the funds may keep a
portion of their assets in cash or cash equivalents including Treasury bills,
commercial paper, repurchase agreements and short-term bank obligations such
as certificates of deposit (CDs) and bankers' acceptances. To the extent
permitted by exemptions granted under the Investment Company Act of 1940, as
amended (1940 Act), and the fund's other investment policies and
restrictions, the Global Fund also may invest in shares of one or more money
market funds managed by Franklin Advisers, Inc. or its affiliates.
TEMPORARY INVESTMENTS When the funds' manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, it may invest
each fund's portfolio in a temporary defensive manner.
When maintaining a temporary defensive position, the Convertible Fund may
invest its assets without limit in U.S. government securities and, subject to
certain tax diversification requirements, commercial paper (short-term debt
securities of large corporations), certificates of deposit and bankers'
acceptances of banks having total assets in excess of $5 billion, repurchase
agreements, and other money market securities.
When maintaining a temporary defensive position, the Equity Fund may invest
any portion of its assets in U.S. government securities, high grade
commercial paper, bankers' acceptances, and variable interest rate corporate
or bank notes.
When the manager believes the Global Fund's portfolio should be invested in a
temporary defensive manner, the fund may have less than 25% of its assets in
foreign government securities. The fund may invest instead in U.S. government
securities, cash (including foreign currency) and cash equivalents including,
but not limited to, CDs, commercial paper, short-term notes and repurchase
agreements. The fund also may invest in shares of one or more money market
funds managed by Franklin Advisers, Inc. or its affiliates. For defensive
purposes, the Global Fund may invest a larger portion of its assets in U.S.
dollar-denominated obligations to help reduce the risks inherent in
obligations denominated in currencies other than the U.S. dollar.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. These loans may not exceed 30% of the value of the Global
Fund's total assets and 10% of the value of the Short-Intermediate Fund, the
Convertible Fund and the Equity Fund's total assets, measured at the time of
the most recent loan. For each loan, the borrower must maintain with the
fund's custodian collateral (consisting of cash) with a value at least equal
to 102% (100% in the case of Equity Fund) of the current market value of the
loaned securities. The fund retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the borrower. The
fund also continues to receive any distributions paid on the loaned
securities. The fund may terminate a loan at any time and obtain the return
of the securities loaned within the normal settlement period for the security
involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. Each fund will loan its
securities only to parties who meet creditworthiness standards approved by
the fund's board of trustees, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
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. A 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 Each fund generally will have a portion of its assets
in cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as
to payment of principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the securities back
to the bank or broker-dealer after a short period of time (generally, less
than seven days) at a higher price. The bank or broker-dealer must transfer
to the fund's custodian securities with an initial market value of at least
102% of the dollar amount invested by the fund in each repurchase agreement.
The manager will monitor the value of such securities daily to determine that
the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
REVERSE REPURCHASE AGREEMENTS. The Global Fund may also enter into reverse
repurchase agreements, which are the opposite of repurchase agreements but
involve similar mechanics and risks. The Global Fund sells securities to a
bank or dealer and agrees to repurchase them at a mutually agreed price and
date. Cash or liquid high-grade debt securities having an initial market
value, including accrued interest, equal to at least 102% of the dollar
amount sold by the Global Fund are segregated as collateral and
marked-to-market daily to maintain coverage of at least 100%. A default by
the purchaser might cause the Global Fund to experience a loss or delay in
the liquidation costs. The Global Fund intends to enter into reverse
repurchase agreements with domestic or foreign banks or securities dealers.
The manager will evaluate the creditworthiness of these entities prior to
engaging in such transactions, under the general supervision of the fund's
board of trustees.
SHORT SALES AGAINST THE BOX The Convertible Fund may make short sales of
common stocks, provided the fund owns an equal amount of these securities or
owns securities that are convertible or exchangeable, without payment of
further consideration, into an equal amount of such common stock. In a short
sale the fund does not immediately deliver the securities sold and does not
receive the proceeds from the sale. To secure its obligation to deliver the
securities sold short, the fund will deposit collateral with its custodian
bank that will generally consist of an equal amount of such securities or
securities convertible into or exchangeable for at least an equal amount of
such securities. The fund may make a short sale when the manager believes the
price of the stock may decline and when, for tax or other reasons, the
manager does not currently want to sell the stock or convertible security it
owns. In this case, any decline in the value of the fund's portfolio
securities would be reduced by a gain in the short sale transaction.
Conversely, any increase in the value of the fund's portfolio securities
would be reduced by a loss in the short sale transaction. The fund may not
make short sales or maintain a short position unless, at all times when a
short position is open, not more than 20% of its total assets (taken at
current value) is held as collateral for such sales.
BORROWING The Global Fund may borrow from banks, for temporary or emergency
purposes only, up to 30% of its total assets, and pledge up to 30% of its
total assets in connection therewith. The Global Fund will not make new
investments while any outstanding borrowings exceed 5% of its total assets.
Neither the Short-Intermediate Fund, nor the Convertible Fund, nor the Equity
Fund borrows money or mortgages or pledges any of its assets, except that
each may borrow from banks for temporary or emergency purposes up to 5% of
its total assets and pledge up to 5% of its total assets in connection
therewith.
ILLIQUID INVESTMENTS Each fund's policy is not to invest more than 10% of its
net assets in illiquid securities. The Short-Intermediate Fund has not
purchased and does not intend currently to purchase illiquid or restricted
securities. Illiquid securities are generally securities that cannot be sold
within seven days in the normal course of business at approximately the
amount at which the fund has valued them.
Illiquid investments include, among other things, repurchase agreements of
more than seven days duration, over-the-counter options and the assets used
to cover such options, and other securities which are not readily marketable.
Investments in savings deposits are generally considered illiquid and will,
together with other illiquid investments, not exceed 10% of each fund's total
net assets. Notwithstanding this limitation, the Board has authorized each
fund to invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933, as amended
(1933 Act) (restricted securities), where such investment is consistent with
the fund's investment objective and has authorized such securities to be
considered liquid to the extent the manager determines that there is a liquid
institutional or other market for such securities. For example, restricted
securities that may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the 1933 Act and for which a liquid
institutional market has developed will be considered liquid even though such
securities have not been registered pursuant to the 1933 Act.
The board will review any determination by the manager to treat a restricted
security as a liquid security on an ongoing basis, including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, the manager and the board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to purchase or sell the security
and the number of other potential purchasers; (iii) dealer undertakings to
make a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer). To
the extent a fund invests in restricted securities that are deemed liquid,
the general level of illiquidity in the fund may be increased if qualified
institutional buyers become uninterested in purchasing these securities or
the market for these securities contracts.
CURRENCY TECHNIQUES AND HEDGING The Global Fund may invest in options,
futures, options on futures, and forward contracts, although the fund has no
present intention of using any of these techniques except forward contracts.
While there are no specific limits on the fund's use of these practices other
than those limits stated below, the fund only engages in these practices for
hedging purposes, or in other words for the purpose of protecting against
declines in the value of the fund's portfolio securities and the income on
these securities. The production of additional income may at times be a
secondary purpose of these practices.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Global Fund may enter into forward
currency exchange contracts (forward contracts) to attempt to minimize the
risk to the fund from adverse changes in the relationship between currencies
or to enhance income. A forward contract is an obligation to buy or sell a
specific currency for an agreed price at a future date that is individually
negotiated and privately traded by currency traders and their customers.
The fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange
of that currency for another currency. The investment position is not itself
a security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
The fund may also enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of that
security. Additionally, for example, when the fund believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell an amount of that foreign currency
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency. Similarly, when the fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency,
it may enter into a forward contract to buy that foreign currency for a fixed
dollar amount.
The fund sets aside or segregates sufficient cash, cash equivalents, or
readily marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of the fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the
ability of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates also may
result in poorer overall performance for the fund than if it had not entered
into such contracts.
The board has adopted the requirement that the Global Fund may only use
futures contracts and options on futures contracts for hedging purposes and
not for speculation. In addition, the Global Fund will not buy or sell
futures contracts and options on futures contracts if immediately thereafter
the amount of initial margin deposits on all the futures positions of the
fund and premiums paid on options on futures contracts would exceed 5% of the
market value of the total assets of the fund.
OPTIONS ON FOREIGN CURRENCIES. The Global Fund may buy and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities or other assets to be acquired. As
in the case of other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of
the premium received. The fund could be required to buy or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate
movements adverse to the fund's position, the fund may forfeit the entire
amount of the premium plus related transaction costs.
DERIVATIVE SECURITIES Although the funds have no present intention of
investing in the following types of securities, the funds may invest in the
securities described below. These securities are generally considered
"derivative securities."
OPTIONS. The Convertible Fund and the Equity Fund may write covered call
options on securities they own that are listed for trading on a national
securities exchange and may buy listed call options. 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.
The Convertible Fund and the Equity Fund may each also buy put options on
common stock that they own 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. 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. The Convertible Fund, the Equity Fund and the
Global 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.
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 the fund, 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 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 in over-the-counter markets.
The risks of the Global Fund's transactions in options on foreign exchanges
are similar to the risks of investing in foreign securities. In addition, a
foreign exchange may impose different exercise and settlement terms,
procedures, and margin requirements than a U.S. exchange.
The Global Fund may buy call options to hedge against an increase in the
price of securities that the fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce any
benefit the Global Fund may realize upon exercise of the option. Unless the
price of the underlying security rises sufficiently, the option may expire
resulting in a loss to the Global Fund equal to the cost of the options.
The ability of the Global Fund to engage in options transactions is subject
to the following limitations: a) the fund may not invest more than 5% of its
total assets in options (including straddles and spreads); b) the obligations
of the fund under put options written by the fund may not exceed 50% of the
fund's net assets; and c) the aggregate premiums on all options purchased by
the fund may not exceed 20% of its net assets.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the buyer of the option the right to buy and
obligates the writer of the option to sell the underlying security at the
exercise price at any time during the option period, regardless of the market
price of the underlying security. The buyer of an option pays a cash premium
that typically reflects, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand factors, and interest rates.
When a fund writes or sells covered call options, it will receive a cash
premium which can be used in whatever way is felt to be most beneficial to
the fund. The risk associated with covered option writing is that in the
event of a price rise on the underlying security which would likely trigger
the exercise of the call option, the fund will not participate in the
increase in price beyond the exercise price.
A put option gives the holder the right to sell the underlying security at
the option exercise price at any time during the option period. A fund may
pay for a put either separately or by paying a higher price for securities
that are purchased subject to a put, thereby increasing the cost of the
securities and reducing the yield otherwise available from the same
securities.
The writer of an option who wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. Likewise, an investor who
is the holder of an option may liquidate its position by effecting a "closing
sale transaction." This is accomplished by selling an option of the same
series as the option previously purchased. If the Global Fund desires to sell
a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction prior to or concurrent with the
sale of the security. However, a writer or holder of an option may not effect
a closing transaction after being notified of the exercise of the option.
A fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. A fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option.
Effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
fund investments. There is no guarantee in any particular situation that
either a closing purchase or a closing sale transaction can be effected. If a
fund is unable to effect a closing purchase transaction in a secondary market
with respect to options it has written, it will not be able to sell the
underlying security or other asset covering the option until the option
expires or it delivers the underlying security or asset upon exercise.
The writer of an option may have no control over when the underlying
securities must be sold in the case of a call option, or purchased in the
case of a put option, since the writer of certain options may be assigned an
exercise notice at any time prior to the expiration of the option. Whether or
not an option expires unexercised, the writer retains the amount of the
premium.
There is no assurance that a liquid market will exist for a given option at
any particular time. To mitigate this risk, the Convertible Fund and the
Equity Fund will ordinarily purchase and write options only if a secondary
market for the option exists on a national securities exchange or in the
over-the-counter market. During the option period, if a fund has written a
covered call option, it will have given up the opportunity to profit from a
price increase in the underlying securities above the exercise price in
return for the premium on the option. However, as long as its obligation as a
writer continues, the fund will have retained the risk of loss should the
price of the underlying security decline.
The Global Fund may write options in connection with "buy-and-write"
transactions; that is, the fund may purchase a security and then write a call
option against that security. The exercise price of the call will depend upon
the expected price movement of the underlying security. The exercise price of
a call option may be below ("in-the-money"), equal to ("at-the-money"), or
above ("out-of-the-money") the current value of the underlying security at
the time the option is written.
Call and put options on stock indices are similar to options on securities
except that, rather than the right to buy or sell particular securities at a
specified price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level
of the underlying stock index is greater than (or less than, in the case of
puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the option, expressed in dollars multiplied by a specified number. Thus,
unlike options on individual securities, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or in
a particular industry or segment of the market) rather than price movements
in individual securities.
INTEREST RATE SWAPS. The Global Fund may participate in interest rate swaps.
An interest rate swap is the transfer between two counterparties of interest
rate obligations, one of which has an interest rate fixed to maturity, while
the other has an interest rate that changes in accordance with changes in a
designated benchmark (i.e., LIBOR, prime, commercial paper, or other
benchmarks). The obligations to make repayment of principal on the underlying
securities are not exchanged. These transactions generally require the
participation of an intermediary, frequently a bank.
Interest rate swaps permit a party seeking a floating rate obligation to acquire
the obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed-rate obligation to acquire the
obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed-rate obligations at a low enough coupon rate to cover the
cost involved.
FUTURES CONTRACTS. The Global Fund may enter into contracts for the purchase
or sale for future delivery of debt securities or currency (futures
contracts). A sale of a futures contract means the acquisition and assumption
of a contractual obligation to deliver the securities or currency called for
by the contract at a specified price on a specified date. A purchase of a
futures contract means the acquisition of a contractual right and obligation
to acquire the securities or currency called for by the contract at a
specified price on a specified date. The Global Fund will enter into futures
contracts that are based on foreign currencies or on debt securities that are
backed by the full faith and credit of the U.S. government, such as long-term
U.S. Treasury bonds, Treasury notes, GNMA modified pass-through
mortgage-backed securities, and three-month U.S. Treasury bills. The Global
Fund may also enter into futures contracts that are based on corporate
securities and non-U.S. government debt securities when such securities
become available.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual
obligation is terminated before the settlement date of the contract without
having to make or take delivery of the securities or currency. The
termination of a contractual obligation is accomplished by buying (or
selling, as the case may be) on a commodities exchange an identical
offsetting futures contract calling for delivery in the same month. Such a
transaction cancels the obligation to make or take delivery of the underlying
security or currency. Since all transactions in the futures market are made,
offset, or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the Global Fund will incur brokerage fees
when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash (securities) or foreign
currency and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
markets are subject to initial deposit and variation margin requirements.
Rather than meeting additional variation margin requirements, investors may
close futures contracts through offsetting transactions which could distort
the normal relationship between the cash (securities) or foreign currency and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus causing distortions.
Due to the possibility of such distortion, a correct forecast of general
interest rate trends by the manager may still not result in a successful
hedging transaction.
OPTIONS ON FUTURES CONTRACTS. The Global Fund intends to purchase and write
options on futures contracts for hedging purposes only. The purchase of a
call option on a futures contract is similar in some respects to the purchase
of a call option on an individual security or currency. Depending on the
pricing of the option compared to either the price of the futures contract
upon which it is based or the price of the underlying debt securities or
currency, it may or may not be less risky than direct ownership of the
futures contract of the underlying debt securities or currency. As with the
purchase of futures contracts, when the Global Fund is not fully invested, it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates or appreciation in the value of a
foreign currency against the U.S. dollar.
If the Global Fund writes a call option on a futures contract and the futures
price at expiration of the option is below the exercise price, the fund will
retain the full amount of the option premium, which may provide a partial
hedge against any decline that may have occurred in the value of the fund's
portfolio holdings. If the futures price at expiration of the option is
higher than the exercise price, the Global Fund will retain the full amount
of the option premium, which may provide a partial hedge against any increase
in the price of securities which the fund intends to purchase. If a put or
call option the Global Fund has written is exercised, the fund will incur a
loss, which will be reduced by the amount of the premium it received.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, the
Global Fund's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of its portfolio securities.
The Global Fund's ability to engage in the options on futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options on futures are relatively new and still
developing, and it is impossible to predict the amount of trading interest
that may exist in various types of options on futures. Therefore, no
assurance can be given that the Global Fund will be able to use these
instruments effectively for the purposes set forth above. Furthermore, the
Global Fund's ability to engage in options on futures transactions may be
limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES. The Global Fund may purchase and write options
on foreign currencies for hedging purposes in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will be
utilized. As with other types of options, however, the benefit the Global
Fund derives from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the Global Fund could sustain losses on transactions in foreign
currency options that would require the fund to forego a portion or all of
the benefits of advantageous changes in such rates.
The Global Fund may also write options on foreign currencies for hedging
purposes. As with other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium received, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Global Fund would be
required to purchase or sell the underlying currency at a loss, which may not
be fully offset by the amount of the premium received. As a result of writing
options on foreign currencies, the Global Fund may also be required to forego
all or a portion of the benefits that might otherwise have been obtained from
favorable changes in currency exchange rates.
All call options written on foreign currencies will be covered.
The Global Fund proposes to take advantage of investment opportunities in the
area of options, futures contracts, and options on futures contracts that are
not presently contemplated for use by the fund or that are not currently
available but may be developed in the future, to the extent such
opportunities are both consistent with the fund's investment objective and
policies and are legally permissible transactions for the fund. These
opportunities, if they arise, may involve risks that are different from those
involved in the options and futures activities described above.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The Convertible Fund, the Equity Fund and the Short-Intermediate Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short," except
that the Convertible Fund may sell securities "short against the box" on the
terms and conditions described in this SAI.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of the fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the fund's
total assets at the time of the most recent loan. The entry into repurchase
agreements is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar
as the fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of the fund in the
securities of any one issuer, but this limitation does not apply to
investments in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities.
6. Purchase the securities of any issuer which would result in owning more
than 10% of any class of the outstanding voting securities of such issuer. To
the extent permitted by exemptions granted under the 1940 Act, the funds may
invest in shares of money market funds managed by the manager or its
affiliates.
7. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or retain securities of any issuer if, to the knowledge of the
trust, one or more of its officers, trustees or investment advisor own
beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities.
8. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the
operation of a predecessor.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs; however, the Convertible Fund and the
Equity Fund may write call options which are listed for trading on a national
securities exchange and purchase put options on securities in their
portfolios (see "Goals and Strategies"). The Convertible Fund and the Equity
Fund may also purchase call options to the extent necessary to cancel call
options previously written and may purchase listed call options provided that
the value of the call options purchased will not exceed 5% of the fund's net
assets. Such funds may also purchase call and put options on stock indices
for defensive hedging purposes. (The Equity Fund will comply with the
California Corporate Securities Rules as they pertain to prohibited
investments.) At present, there are no options listed for trading on a
national securities exchange covering the types of securities which are
appropriate for investment by the Short-Intermediate Fund and, therefore,
there are no option transactions available for that fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition, or reorganization; or except to
the extent the funds invest their uninvested daily cash balances in shares of
the Franklin Money Fund and other money market funds in the Franklin
Templeton Group of Funds provided i) their purchases and redemptions of such
money fund shares may not be subject to any purchase or redemption fees, ii)
their investments may not be subject to duplication of management fees, nor
to any charge related to the expense of distributing the fund's shares (as
determined under Rule 12b-1, as amended, under the federal securities laws)
and (iii) provided aggregate investments by the fund in any such money fund
do not exceed (A) the greater of (i) 5% of the fund's total net assets or
(ii) $2.5 million, or (B) more than 3% of the outstanding shares of any such
money fund.
13. Issue senior securities, as defined in the 1940 Act, except that this
restriction will not prevent the fund from entering into repurchase
agreements or making borrowings, mortgages and pledges as permitted by
restriction #1 above.
Restriction No. 9 above does not prevent a fund from investing in REITs if
they meet the investment goal and policies of the fund. The Equity Fund, as
noted in the prospectus, may invest up to 15% of its net assets in REITs.
The Global Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the fund, except
that it may borrow from banks, for temporary or emergency purposes, up to 30%
of its total assets and pledge up to 30% of its total assets in connection
therewith. (No new investments will be made by the fund while any outstanding
borrowings exceed 5% of its total assets.)
2. Buy any securities on "margin," except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities and except that the fund may make margin deposits in
connection with futures contracts and options on futures contracts.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
portfolio securities of the fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a
result, the aggregate of such loans exceeds 30% of the value of the fund's
total assets (taken at market value) at the time of the most recent loan.
Also, entry into repurchase agreements is not considered a loan for purposes
of this restriction.
4. Act as underwriter of securities issued by other persons except insofar
as the fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio securities.
5. Invest more than 25% of its assets in the securities of issuers in any
one industry, other than foreign governments.
6. Purchase from or sell any portfolio securities to its officers and
trustees, or any firm of which any officer or trustee is a member, as
principal, except that the fund may deal with such persons or firms as
brokers and pay a customary brokerage commission; retain securities of any
issuer, if to the knowledge of the fund, one or more of its officers,
trustees or the investment manager own beneficially more than one-half of 1%
of the securities of such issuer and all such persons together own
beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
8. Invest in interests in oil, gas or other mineral exploration or
development programs.
9. Invest in companies for the purpose of exercising control or management.
10. Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issuer as, and equal in
amount to, the securities sold short (short sales against the box), and
unless not more than 10% of the fund's net assets (taken at market value) is
held as collateral for such sales at any one time.
The Global Fund presently has the following additional restrictions, which
are not fundamental and may be changed without shareholder approval.
The Global Fund may not:
1. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the
operation of a predecessor.
2. Buy securities of other investment companies except in accordance with the
1940 Act, and except that the fund may invest its assets in shares of one or
more money market funds managed by Franklin Advisers, Inc. or its affiliates,
to the extent permitted by exemptions granted under the 1940 Act.
3. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures contracts, forward contracts or repurchase transactions.
The Convertible Fund and the Global Fund may also be subject to investment
limitations imposed by foreign jurisdictions in which the funds sell their
shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
funds intend to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when a fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions. If a
percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
- ------------------------------------------------------------------------------
MORTGAGE SECURITIES The Short-Intermediate Fund's investment in
mortgage-backed securities differs from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans.
During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at
lower rates. The fund may be forced to reinvest returned principal at lower
interest rates, reducing the fund's income. For this reason, mortgage-backed
securities may be less effective than other types of securities as a means of
"locking in" long-term interest rates and may have less potential for capital
appreciation during periods of falling interest rates than other investments
with similar maturities. A reduction in the anticipated rate of principal
prepayments, especially during periods of rising interest rates, may increase
the effective maturity of mortgage-backed securities, making them more
susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase the volatility of the fund's returns
and share price.
To the extent mortgage securities are purchased at a premium, unscheduled
principal prepayments, including prepayments resulting from mortgage
foreclosures, may result in some loss of the holder's principal investment to
the extent of the premium paid. On the other hand, if mortgage securities are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current and total returns
and will accelerate the recognition of income which, when distributed to you,
will be taxable as ordinary income.
LOWER RATED SECURITIES Because the Global Fund and the Convertible Fund may
invest in securities below investment grade, an investment in the fund is
subject to a higher degree of risk than an investment in a fund that invests
primarily in higher-quality securities. You should consider the increased
risk of loss to principal that is present with an investment in higher risk
securities, such as those in which the Global Fund and the Convertible Fund
invest. Accordingly, an investment in the Global Fund or the Convertible Fund
should not be considered a complete investment program and should be
carefully evaluated for its appropriateness in light of your overall
investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Global Fund's or the Convertible Fund's portfolio defaults, the fund may
have unrealized losses on the security, which may lower the fund's net asset
value. Defaulted securities tend to lose much of their value before they
default. Thus, the Global Fund's or the Convertible Fund's net asset value
may be adversely affected before an issuer defaults. In addition, the Global
Fund or the Convertible Fund may incur additional expenses if it must try to
recover principal or interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the fund. The premature disposition of a
high yield security due to a call or buy-back feature, the deterioration of
an issuer's creditworthiness, or a default by an issuer may make it more
difficult for a fund to manage the timing of its income. To generate cash to
satisfy these distribution requirements, the Global Fund or the Convertible
Fund may have to sell portfolio securities that it otherwise may have
continued to hold or use cash flows from other sources, such as the sale of
fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the Global Fund or the
Convertible Fund's ability to sell a security in response to a specific
economic event, such as a deterioration in the creditworthiness of the
issuer, or if necessary to meet the fund's liquidity needs. Reduced liquidity
may also make it more difficult to obtain market quotations based on actual
trades for purposes of valuing the Global Fund or the Convertible Fund's
portfolio.
The Global Fund and the Convertible Fund may buy high yield, fixed-income
securities that are sold without registration under the federal securities
laws and therefore carry restrictions on resale. While many high yielding
securities have been sold with registration rights, covenants, and penalty
provisions for delayed registration, if the Global Fund or the Convertible
Fund is required to sell restricted securities before the securities have
been registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and
liabilities. The Global Fund or the Convertible Fund may also incur special
costs in disposing of restricted securities, although the Global Fund or the
Convertible Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Global Fund and the Convertible Fund may buy high yield, fixed-income
securities during an initial underwriting. These securities involve special
risks because they are new issues. The manager will carefully review their
credit and other characteristics. Neither the Global Fund nor the Convertible
Fund has an arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the Global Fund's or the Convertible Fund's net asset value.
The Global Fund and the Convertible Fund rely on the manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In
this evaluation, the manager takes into consideration, among other things,
the issuer's financial resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's management, and
regulatory matters.
NON-DIVERSIFICATION Because the Global Fund is non-diversified, there is no
restriction on the percentage of its assets that it may invest at any time in
the securities of any issuer. Nevertheless, the Global Fund's non-diversified
status may expose it to greater risk or volatility than diversified funds
with otherwise similar investment policies, since the fund may invest a
larger portion of its assets in securities of a small number of issuers.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments
in emerging markets. Investments in depositary receipts also involve some or
all of the risks described below.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), restrictions on removal of assets, political
or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. A fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than
those in the U.S. or other major economies. In many foreign countries there
is less government supervision and regulation of stock exchanges, brokers,
and listed companies than in the U.S. Foreign markets have substantially less
volume than the New York Stock Exchange and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. Settlement practices may be cumbersome and result in delays that may
affect portfolio liquidity. The funds may have greater difficulty voting
proxies, exercising shareholder rights, pursuing legal remedies, and
obtaining judgments with respect to foreign investments in foreign courts
than with respect to domestic issuers in U.S. courts.
A fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty
(for example, regional conflicts and risk of war); (iii) pervasiveness of
corruption and crime; (iv) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which
result in a lack of liquidity and in greater price volatility; (v) delays in
settling portfolio transactions; (vi) risk of loss arising out of the system
of share registration and custody; (vii) certain national policies that may
restrict the fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(viii) foreign taxation; (ix) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (x) the absence of a capital market structure or
market-oriented economy; and (xi) the possibility that recent favorable
economic developments may be slowed or reversed by unanticipated political or
social events.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
CURRENCY The funds' management endeavors to buy and sell foreign currencies
on as favorable a basis as practicable. Some price spread in currency
exchange (to cover service charges) may be incurred, particularly when a fund
changes investments from one country to another or when proceeds of the sale
of shares in U.S. dollars are used for the purchase of securities in foreign
countries. Some countries may adopt policies that would prevent a fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source.
The funds may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the funds may invest may also have
fixed or managed currencies that are not free-floating against the U.S.
dollar. Certain currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. The
funds' manager endeavors to avoid unfavorable consequences and to take
advantage of favorable developments in particular nations where, from time to
time, it places the fund's investments.
Any investments by the funds in foreign securities where delivery takes place
outside the U.S. will be made in compliance with applicable U.S. and foreign
currency restrictions and other tax laws and laws limiting the amount and
types of foreign investments. Although current regulations do not, in the
opinion of the funds' manager, limit seriously the funds' investment
activities, if they were changed in the future they might restrict the
ability of a fund to make its investments or tend to impair the liquidity of
the fund's investments. Changes in governmental administrations, economic or
monetary policies in the U.S. or abroad, or circumstances in dealings between
nations could result in investment losses for the funds and could adversely
affect the funds' operations.
The funds' board considers at least annually the likelihood of the imposition
by any foreign government of exchange control restrictions that would affect
the liquidity of the funds' assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The board also considers the
degree of risk involved through the holding of portfolio securities in
domestic and foreign securities depositories. However, in the absence of
willful misfeasance, bad faith, or gross negligence on the part of the funds'
manager, any losses resulting from the holding of a fund's portfolio
securities in foreign countries and/or with securities depositories will be
at the risk of the shareholders. No assurance can be given that the board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
The Global Fund may invest in debt securities denominated in U.S. and foreign
currencies. A change in the value of any foreign currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Global Fund's assets denominated in the foreign currency. These changes will
also affect the Global Fund's yield, income, and distributions to
shareholders. In addition, although the Global Fund receives income in
various currencies, the fund is required to compute and distribute its income
in U.S. dollars. Therefore, if the exchange rate for any currency depreciates
after the Global Fund's income has been accrued and translated into U.S.
dollars, the fund could be required to liquidate portfolio securities to make
its distributions. Similarly, if an exchange rate depreciates between the
time the Global Fund incurs expenses in U.S. dollars and the time the
expenses are paid, the amount of a currency required to be converted into
U.S. dollars in order to pay such expenses in U.S. dollars will be greater
than the equivalent amount in any such currency at the time the expenses were
incurred. The Global Fund will only invest in foreign currency denominated
debt securities of countries whose currency is fully exchangeable into U.S.
dollars without legal restriction at the time of investment.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
DEBT SECURITIES Debt securities are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations (credit
risk) and may also be subject to price volatility due to factors such as
interest rate sensitivity, market perception of the creditworthiness of the
issuer, and general market liquidity (market risk). The manager considers
both credit risk and market risk in making investment decisions as to
corporate debt obligations. Debt obligations will tend to decrease in value
when prevailing interest rates rise and increase in value when prevailing
interest rates fall. Generally, long-term debt obligations are more sensitive
to interest rate fluctuations than short-term obligations. Because
investments in debt obligations are interest rate sensitive, a fund's
performance may be affected by the manager's ability to anticipate and
respond to fluctuations in market interest rates, to the extent of the fund's
investment in debt obligations.
REITS An investment in REITs includes the possibility of a decline in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants, and increases in interest rates. The value of
securities of companies that service the real industry will also be affected
by these risks.
In addition, equity REITs are affected by changes in the value of the
underlying property owned by the trusts, while mortgage REITs are affected by
the quality of the properties to which they have extended credit. Equity and
mortgage REITs are dependent upon the REIT's management skill. REITs may not
be diversified and are subject to the risks of financing projects.
FINANCIAL SERVICES COMPANIES Because the Equity Fund invests in stocks of
financial services companies, the fund's investments and performance will be
affected by general market and economic conditions as well as other risk
factors particular to the financial services industry. Financial services
companies are subject to extensive government regulation. This regulation may
limit both the amount and types of loans and other financial commitments a
financial services company can make, and the interest rates and fees it can
charge. Such limitations may have a significant impact on the profitability
of a financial services company since that profitability is attributable, at
least in part, to the company's ability to make financial commitments such as
loans. Profitability of a financial services company is largely dependent
upon the availability and cost of the company's funds, and can fluctuate
significantly when interest rates change. The financial difficulties of
borrowers can negatively impact the industry to the extent that borrowers may
not be able to repay loans made by financial services companies.
Insurance companies may be subject to severe price competition, claims
activity, marketing competition and general economic conditions. Particular
insurance lines will also be influenced by specific matters. Property and
casualty insurer profits may be affected by certain weather catastrophes and
other disasters. Life and health insurer profits may be affected by mortality
risks and morbidity rates. Individual insurance companies may be subject to
material risks including inadequate reserve funds to pay claims and the
inability to collect from the insurance companies which insure insurance
companies, so-called reinsurance carriers.
Congress is currently considering legislation that would reduce the
separation between commercial and investment banking businesses. Commercial
banks typically have been limited to certain non-securities activities such
as making loans and accepting deposits. Investment banks have typically
engaged in more extensive securities activities. If enacted, the proposed
legislation could significantly impact the industry. While banks may be able
to expand the services which they offer if legislation broadening bank powers
is enacted, expanded powers could expose banks to well-established
competitors, particularly as the historical distinctions between banks and
other financial institutions erode. In addition, the financial services
industry is an evolving and competitive industry that is undergoing
significant change. Such changes have resulted from various consolidations as
well as the continual development of new products, structures and a
regulatory framework that is anticipated to be subject to further change.
SMALLER COMPANIES From time to time, a number of the convertible securities
in which the Convertible Fund may invest may be issued by smaller companies.
Historically, smaller companies have been more volatile in price than larger
company securities, especially over the short term. Among the reasons for the
greater price volatility are the less certain growth prospects of smaller
companies, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller companies to changing economic
conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
OPTIONS ON SECURITIES The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If the market
price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and a fund's gain will be limited
to the premium received. If the market price of the underlying security
declines or otherwise is below the exercise price, a fund may elect to close
the position or wait for the option to be exercised and take delivery of the
security at the exercise price. A fund's return will be the premium received
from the put option minus the amount by which the market price of the
security is below the exercise price. The Global Fund may use
out-of-the-money, at-the-money, and in-the-money put options in the same
market environments in which it uses call options in equivalent buy-and-write
transactions.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, the Global Fund as an option writer could lose
amounts substantially in excess of its initial investment, due to the margin
and collateral requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the U.S. Securities and Exchange Commission (SEC), as are
other securities traded on such exchanges. As a result, many of the
protections provided to traders on organized exchanges will be available with
respect to such transactions. In particular, all option positions entered
into on a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation, thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
In regard to the Global Fund's option trading activities, it intends to
comply with the California Corporate Securities Rules as they pertain to
prohibited investments.
A fund's option trading activities may result in the loss of principal under
certain market conditions.
FUTURES CONTRACTS Futures contracts entail certain risks. Although the Global
Fund believes that the use of futures contracts will benefit the fund, if the
manager's investment judgment about the general direction of interest or
currency exchange rates is incorrect, the fund's overall performance would be
poorer than if it had not entered into any such contract. For example, if the
Global Fund has hedged against the possibility of an increase in interest
rates that would adversely affect the price of bonds held in its portfolio
and interest rates decrease instead, the fund will lose part or all of the
benefit of the increased value of the bonds which it has hedged because it
will have offsetting losses in its futures positions. Similarly, if the
Global Fund sells a foreign currency futures contract and the U.S. dollar
value of the currency unexpectedly increases, the fund will lose the
beneficial effect of the increase on the value of the security denominated in
that currency. In addition, in such situations, if the Global Fund has
insufficient cash, it may have to sell bonds from its portfolio to meet daily
variation margin requirements. Sales of bonds may be, but are not
necessarily, at increased prices that reflect the rising market. The Global
Fund may have to sell securities at a time when it may be disadvantageous to
do so.
OPTIONS ON FUTURES CONTRACTS The amount of risk the Global Fund assumes when
it purchases an option on a futures contract is the premium paid for the
option plus related transaction costs. In addition to the correlation risks
discussed above, the purchase of an option also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected
in the value of the option purchased. The Global Fund will purchase a put
option on a futures contract only to hedge the fund's portfolio against the
risk of rising interest rates or the decline in the value of securities
denominated in a foreign currency.
FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, AND OPTIONS ON FUTURES
CONTRACTS Forward contracts are not traded on contract markets regulated by
the Commodity Futures Trading Commission (CFTC) or by the SEC. The ability of
the Global Fund to use forward contracts could be restricted to the extent
that Congress authorizes the CFTC or the SEC to regulate such transactions.
Forward contracts are traded through financial institutions acting as market
makers.
The purchase and sale of exchange-traded foreign currency options are subject
to the risks of the availability of a liquid secondary market, as well as the
risks of adverse market movements, margins of options written, the nature of
the foreign currency market, possible intervention by governmental
authorities, and the effects of other political and economic events.
Futures contracts on currencies, options on futures contracts, and options on
foreign currencies may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies. The value of such positions could also be
adversely affected by (i) other foreign political and economic factors, (ii)
less available data than in the U.S. on which to base trading decisions,
(iii) delays in the Global Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the U.S., (iv) the
imposition of exercise and settlement terms and procedures, and margin
requirements different from those in the U.S., and (v) lesser trading volume.
OFFICERS AND TRUSTEES
- ------------------------------------------------------------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
S. Joseph Fortunato (67)
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman
(1995-1997) and Trustee (1993-1997), National Child Research Center, Assistant
to the President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
*Edward B. Jamieson (51)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
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 51 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Reclamation (redevelopment); director or trustee, as
the case may be, of 27 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee, as
the case may be, of 47 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chairman, White River Corporation (financial
services) (until 1998) and Hambrecht and Quist Group (investment banking) (until
1992), President, National Association of Securities Dealers, Inc. (until 1987).
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton Services,
Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin
Investment Advisory Services, Inc. and 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 51 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 51 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Senior Vice
President and General Counsel, Franklin Resources, Inc., Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.,
Executive Vice President, Franklin Advisers, Inc., Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC, and Vice President,
Chief Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 51 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 33 of the investment companies in the Franklin
Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 51 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST 1 ($) FUNDS 2 ($) EACH SERVES 3
- --------------------------------------------------------------------------------
Frank Abbott, III 10,209 156,060 27
Harris Ashton 11,227 363,165 47
S. Joseph Fortunato 10,459 363,238 49
Edith E. Holiday 12,900 237,265 24
Frank W.T. LaHaye 10,209 156,060 27
Gordon Macklin 11,227 363,165 47
1. For the fiscal year ended October 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 53 registered investment companies, with
approximately 155 U.S. based funds or series.
Noninterested board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for the funds to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the funds. Similarly, with respect
to the funds, the manager isnot obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the funds or other funds it manages.
Each fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the fund or that are currently held by the fund, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
The Global Fund's sub-advisor is Templeton Investment Counsel, Inc., through
its Global Bond Managers division. The sub-advisor has an agreement with the
manager and provides the manager with investment management advice and
assistance. The sub-advisor furnishes, subject to the manager's discretion, a
portion of the investment advisory services for which the manager is
responsible pursuant to the management agreement. These responsibilities may
include managing a portion of the Global Fund's investments and supplying
research services. The sub-advisor's activities are subject to the board's
review and control, as well as the manager's instruction and supervision.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over $250
million; and
o 9/240 of 1% of the value of net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a fund's
shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
-------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Convertible Fund 1,026,060 1,377,487 1,075,628
Equity Fund 2,549,864 2,419,689 1,783,336
Global Fund 639,062 722,502 785,629
Short-Intermediate Fund 1,128,453 1,118,373 1,076,296
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.35% of the average monthly net assets up to and including $100 million;
o 0.25% of the average monthly net assets over $100 million and not over $250
million; and
o 0.20% of the average monthly net assets in excess of $250 million.
The manager pays this fee from the management fees it receives from the Global
Fund. For the last three fiscal years ended October 31, the manager paid the
following sub-advisory fees:
SUB-ADVISORY
FEES PAID ($)
- -----------------------------------------------------------------
1999 357,031
1998 397,509
1997 428,496
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by
Resources and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
-------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Convertible Fund 273,294 369,613 297,444
Equity Fund 724,290 678,739 514,630
Global Fund 154,285 179,253 215,869
Short-Intermediate Fund 301,462 296,460 310,121
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the funds' shareholder servicing agent
and acts as the funds' transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
funds also will 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
funds. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the funds to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the Convertible Fund's and
the Equity Fund's portfolio transactions in accordance with criteria set
forth in the management agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit a fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
Since most purchases by the Global Fund and the Short-Intermediate Fund are
principal transactions at net prices, the funds incur little or no brokerage
costs. The funds deal directly with the selling or buying principal or market
maker without incurring charges for the services of a broker on its behalf,
unless it is determined that a better price or execution may be obtained by
using the services of a broker. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers will include a spread between the
bid and ask prices. The funds seek to obtain prompt execution of orders at
the most favorable net price. Transactions may be directed to dealers in
return for research and statistical information, as well as for special
services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the funds' 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, also may be considered a factor in the selection of
broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when a fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of a fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended October 31, the Convertible Fund and
the Equity Fund paid the following brokerage commissions:
BROKERAGE COMMISSIONS ($)
-------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Convertible Fund 147,342 107,591 147,042
Equity Fund 646,124 453,051 401,820
During the same periods, the Global Fund and the Short Intermediate Fund did not
pay any brokerage commissions.
For the fiscal year ended October 31, 1999, the Short-Intermediate Fund,
Convertible Fund and Equity Fund paid brokerage commissions of $56,457, $32,220
and $49,555, respectively, from aggregate portfolio transactions of $20,921,449,
$29,911,103 and $14,249,580, respectively, to brokers who provided research
services. For the fiscal year ended October 31, 1999, the Global Fund did not
pay brokerage commissions to brokers who provided research services.
As of October 31, 1999, the Global Fund and the Short-Intermediate Fund did not
own securities of their regular broker-dealers. As of the same date, the
Convertible Fund owned securities issued by Morgan Stanley Dean Witter & Co.,
Merrill Lynch Pierce Fenner & Smith, and Morgan Stanley Dean Witter & Co. valued
in the aggregate at $3,175,000, $1,977,000 and 1,494,000, respectively, and the
Equity Fund owned securities issued by J.P. Morgan & Co. Inc. and Bank of
America Securities LLC valued in the aggregate at $4,908,000 and $4,378,000.
Except as noted, the Convertible Fund and the Equity Fund did not own any
securities issued by their regular broker-dealers as of the end of the fiscal
year.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. The funds do
not pay "interest" or guarantee any fixed rate of return on an investment in
their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a 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 funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, to reduce or eliminate excise or income taxes on a
fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities are generally treated as ordinary losses by a fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce a fund's ordinary income otherwise available for
distribution to you. This treatment could increase or decrease a fund's
ordinary income distributions to you, and may cause some or all of a fund's
previously distributed income to be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the Global Fund's total assets
at the end of the fiscal year are invested in securities of foreign
corporations, the Global Fund may elect to pass-through to you your pro rata
share of foreign taxes paid by it. If this election is made, the year-end
statement you receive from the Global Fund will show more taxable income than
was actually distributed to you. However, you will be entitled to either
deduct your share of such taxes in computing your taxable income or (subject
to limitations) claim a foreign tax credit for such taxes against your U.S.
federal income tax. The Global Fund will provide you with the information
necessary to complete your individual income tax return if it makes this
election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, a fund will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these distributions in December (or to pay them in January, in which case
you must treat them as received in December) but can give no assurances that
its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state
income tax purposes. If you redeem your fund shares, or exchange your fund
shares for shares of a different Franklin Templeton Fund, the IRS will
require that you report any gain or loss on your redemption or exchange. If
you hold your shares as a capital asset, the gain or loss that you realize
will be capital gain or loss and will be long-term or short-term, generally
depending on how long you hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from
the sale of fund shares held for more than five years may be subject to a
reduced tax rate.
Any loss incurred on the redemption or exchange of shares held for six months
or less will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the fund on those shares. All
or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in such
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in such fund or in another Franklin
Templeton Fund within 90 days of buying the original shares, the sales charge
that would otherwise apply to your reinvestment may be reduced or eliminated.
The IRS will require you to report any gain or loss on the redemption of your
original shares in a fund. In doing so, all or a portion of the sales charge
that you paid for your original shares in a fund will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss
upon the sale of such shares). The portion of the sales charge excluded will
equal the amount that the sales charge is reduced on your reinvestment. Any
portion of the sales charge excluded from your tax basis in the shares sold
will be added to the tax basis of the shares you acquire from your
reinvestment.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that
must be met by a fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 53.23% of the dividends paid by the
Convertible Fund and 79.06% of the dividends paid by the Equity Fund for the
most recent fiscal year qualified for the dividends-received deduction. You
may be allowed 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 such fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
Because the Global Fund's income is derived primarily from investments in
foreign rather than domestic securities and the Short-Intermediate Fund's
income is derived primarily from interest rather than dividends, generally
none of these funds' distributions will be eligible for the corporate
dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund (possibly causing a fund to sell securities to raise the
cash for necessary distributions) and/or defer a fund's ability to recognize
losses, and, in limited cases, subject the Global Fund to U.S. federal income
tax on income from certain foreign securities. In turn, these rules may
affect the amount, timing or character of the income distributed to you by a
fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
The Global Fund is a nondiversified series, and each other fund is a
diversified series of Franklin Investors Securities Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Massachusetts business trust on December 22, 1986, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations.
The Agreement and Declaration of Trust, however, contains an express
disclaimer of shareholder liability for acts or obligations of the funds. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of a fund's assets if you are held personally liable for
obligations of the fund. The Declaration of Trust provides that a 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 each 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 a fund as an
investment company, as distinguished from an operating company, would not
likely give rise to liabilities in excess of the fund's total assets. Thus,
the risk that you would incur financial loss on account of shareholder
liability is limited to the unlikely circumstance in which both inadequate
insurance exists and the fund itself is unable to meet its obligations.
The Convertible Fund currently offers two classes of shares, Class A and
Class C. The Equity Fund currently offers three classes of shares, Class A,
Class B, and Class C. The Global Fund currently offers three classes of
shares, Class A, Class C and Advisor Class. The Short-Intermediate Fund
currently offers two classes of shares, Class A and Advisor Class. The Equity
Fund began offering Class B shares on January 1, 1999. Each fund may offer
additional classes of shares in the future. The full title of each class is:
o Franklin Convertible Securities Fund - Class A
o Franklin Convertible Securities Fund - Class C
o Franklin Equity Income Fund - Class A
o Franklin Equity Income Fund - Class B
o Franklin Equity Income Fund - Class C
o Franklin Global Government Income Fund - Class A
o Franklin Global Government Income Fund - Class C
o Franklin Global Government Income Fund - Advisor Class
o Franklin Short-Intermediate U.S. Government Securities Fund -
Class A
o Franklin Short-Intermediate U.S. Government Securities Fund -
Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect a fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only
one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a board member. A special meeting also may be called by the board in its
discretion.
As of February 1, 2000, the principal shareholders of the funds, beneficial
or of record, were:
SHARE PERCENTAGE
NAME AND ADDRESS CLASS %
- --------------------------------------------------------------------------------
GLOBAL FUND
Franklin Templeton Trust Company1
for the IRA of
Frank J. Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 26.65
Franklin Templeton Trust Company1
for the IRA of
Margo Mynderse Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 26.65
Franklin Templeton Trust Company1
for the IRA of
Margo Mynderse Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 25.77
Franklin Templeton Trust Company1
for the IRA of
Margo Mynderse Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 10.37
Franklin Templeton Trust Company1
for the IRA of
Deborah Gatzek Kratter
1600 Marlborough Rd.
Hillsborough, CA 94010-7114 Advisor 9.11
Short-Intermediate Fund
Franklin Templeton Trust Company1
FBO Harris J. Ashton IRA
P. O. Box 5086
San Mateo, CA 94402-0086 Advisor 57.32
Equity Fund
Donna Marzarella
275 Larchmount Rd.
Union, NJ 07083 Class B 8.57
Albert N. Vock
1202 Gregden Shores
Sterling, IL 61081 Class B 5.79
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the Convertible Fund, no other person
holds beneficially or of record more than 5% of the outstanding shares of any
class.
As of February 1, 2000, the officers and board members, as a group, owned of
record and beneficially 10.5% of the Global Fund - Advisor Class, and 58.02% of
the Short-Intermediate Fund - Advisor Class and less than 1% of the outstanding
shares of the other funds and classes. The board members may own shares in other
funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
Each fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with a fund. This reference is for convenience only and
does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the funds may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of a 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. We may deduct any applicable banking
charges imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for the
Convertible Fund - Class A and the Equity Fund - Class A, 4.25% for the Global
Fund - Class A and 2.25% for the Short-Intermediate Fund - Class A, and 1% for
the Convertible Fund - Class C, the Equity Fund - Class C, and the Global Fund -
Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with a fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with a fund before a change in the fund's
sales charge, you may complete the LOI at the lower of the new sales charge
or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period, except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to a fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased a fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of a fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in a fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds
in a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date they
are redeemed from the money fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined a fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in a fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge
by any investor who buys Class C shares through an omnibus account with
Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the
shares are sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
funds, to add together certain small qualified retirement plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the funds' shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The funds' Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
CONVERTIBLE FUND AND EQUITY FUND
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- --------------------------------------------------------------------------------
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 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of the Convertible Fund or the Equity Fund of $1 million or more: 1%
on sales of $1 million to $2 million, plus 0.80% on sales over $2 million to
$3 million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100
million, and for purchases of Class A shares of the Global Fund and 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.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for
purchases of Class A shares by certain retirement plans without an initial
sales charge. These payments may be made 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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin Templeton Group of Funds.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial
purchase in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by a fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE For the Convertible Fund, the Equity Fund and the Global
Fund, if you request the exchange of the total value of your account,
declared but unpaid income dividends and capital gain distributions will be
reinvested in the fund and exchanged into the new fund at net asset value
when paid. For the Short-Intermediate Fund, if you request the exchange of
the total value of your account, accrued but unpaid income dividends and
capital gain distributions will be reinvested in the fund at net asset value
on the date of the exchange, and then the entire share balance will be
exchanged into the new fund. Backup withholding and information reporting may
apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a 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 each fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company generally are
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at net asset value at the close of business on the day the
request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at
least $50. For retirement plans subject to mandatory distribution
requirements, the $50 minimum will not apply. There are no service charges
for establishing or maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan also
may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from a
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Each fund may discontinue a systematic
withdrawal plan by notifying you in writing and will automatically
discontinue a systematic withdrawal plan if all shares in your account are
withdrawn or if the fund receives notification of the shareholder's death or
incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the U.S. Securities
and Exchange Commission (SEC). In the case of redemption requests in excess
of these amounts, the board reserves the right to make payments in whole or
in part in securities or other assets of the fund, in case of an emergency,
or if the payment of such a redemption in cash would be detrimental to the
existing shareholders of the fund. In these circumstances, the securities
distributed would be valued at the price used to compute the fund's net
assets and you may incur brokerage fees in converting the securities to cash.
The funds do not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This
eliminates the costly problem of replacing lost, stolen or destroyed
certificates. If a certificate is lost, stolen or destroyed, you may have to
pay an insurance premium of up to 2% of the value of the certificate to
replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to a 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 a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in
less than the seven day period prescribed by law. Neither a fund nor its
agents shall be liable to you or any other person if, for any reason, a
redemption request by wire or ACH is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with a 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 also may charge a fee for their services directly to
their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to a fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, each fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the funds value those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The funds value over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the funds value them according to the broadest and most
representative market as determined by the manager.
The Global Fund, the Convertible Fund, and the Equity Fund value portfolio
securities underlying actively traded call options at their market price as
determined above. The current market value of any option a fund holds is its
last sale price on the relevant exchange before the fund values its assets.
If there are no sales that day or if the last sale price is outside the bid
and ask prices, a fund values options within the range of the current closing
bid and ask prices if the fund believes the valuation fairly reflects the
contract's market value.
The Convertible Fund and the Equity Fund determine the value of a foreign
security as of the close of trading on the foreign exchange on which the
security is traded or as of the close of trading on the NYSE, if that is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value
of the foreign security is determined. If no sale is reported at that time,
the foreign security is valued within the range of the most recent quoted bid
and ask prices. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which
they are determined and the close of the exchange and will, therefore, not be
reflected in the computation of the NAV. If events materially affecting the
values of these foreign securities occur during this period, the securities
will be valued in accordance with procedures established by the board.
For the Global Fund, trading in securities on European and Far Eastern
securities exchanges and over-the-counter markets is normally completed well
before the close of business of the NYSE on each day that the NYSE is open.
Trading in European or Far Eastern securities generally, or in a particular
country or countries, may not take place on every NYSE business day.
Furthermore, trading takes place in various foreign markets on days that are
not business days for the NYSE and on which the fund's NAV is not calculated.
Thus, the calculation of the fund's NAV does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used
in the calculation and, if events materially affecting the values of these
foreign securities occur, the securities will be valued at fair value as
determined by management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
funds may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
October 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- --------------------------------------------------------------------------------
1999
Convertible Fund 237,347 27,070 37,204
Equity Fund 988,893 117,829 72,920
Global Fund 90,820 5,373 4,376
Short-Intermediate Fund 228,234 26,310 22,687
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- --------------------------------------------------------------------------------
1998
Convertible Fund 1,162,596 108,306 24,871
Equity Fund 1,861,175 180,988 25,388
Global Fund 234,760 13,932 2,369
Short-Intermediate Fund 383,582 50,338 -
1997
Convertible Fund 1,373,166 130,410 8,497
Equity Fund 1,524,045 144,609 13,137
Global Fund 16,188 12,577 3,054
Short-Intermediate Fund 330,666 42,408 -
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit each fund and its
shareholders. The plans are expected to, among other things, increase
advertising of the fund, encourage sales of the fund and service to its
shareholders, and increase or maintain assets of the fund so that certain
fixed expenses may be spread over a broader asset base, resulting in lower
per share expense ratios. In addition, a positive cash flow into the fund is
useful in managing the fund because the manager has more flexibility in
taking advantage of new investment opportunities and handling shareholder
redemptions.
Under each plan, each fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others
who have executed a servicing agreement with the fund, Distributors or its
affiliates who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for
sales purposes, and of preparing and distributing sales literature and
advertisements; and a prorated portion of Distributors' overhead expenses
related to these activities. Together, these expenses, including the service
fees, are "eligible expenses." The distribution and service (12b-1) fees
charged to each class are based only on the fees attributable to that
particular class.
THE CLASS A PLAN. The Convertible Fund and Equity Fund may pay up to 0.25%
per year of Class A's average daily net assets. The Global Fund and
Short-Intermediate Fund may pay up to 0.15% and 0.10%, respectively, per year
of Class A's average daily net assets. The Class A plan is a reimbursement
plan. It allows each fund to reimburse Distributors for eligible expenses
that Distributors has shown it has incurred. The fund will not reimburse more
than the maximum amount allowed under the plan. Any unreimbursed expenses
from one year may not be carried over to or reimbursed in later years.
For the fiscal year ended October 31, 1999, the amounts paid by the fund
pursuant to the plan were:
SHORT-
CONVERTIBLE EQUITY GLOBAL INTERMEDIATE
($) ($) ($) ($)
- --------------------------------------------------------------------------------
Advertising 4,740 23,069 917 19,136
Printing and mailing
prospectuses other
than to current
shareholders 22,142 27,947 7,888 4,353
Payments to
underwriters 2,047 13,292 1,342 5,234
Payments to
broker-dealers 321,607 936,840 97,450 151,635
Other 17,628 66,437 10,459 11,220
-------------------------------------------------------
Total 368,164 1,067,585 118,056 191,578
=======================================================
THE CLASS B (EQUITY FUND ONLY) AND C (CONVERTIBLE FUND, EQUITY FUND AND GLOBAL
FUND ONLY) PLANS. The Convertible Fund and Equity fund pay Distributors up to 1%
per year of the class's average daily net assets, out of which 0.25% may be used
for service fees. The Global Fund pays Distributors up to 0.65% per year of the
class's average daily net assets, out of which 0.15% may be used for service
fees. The Class B and C plans also may be used to pay Distributors for advancing
commissions to securities dealers with respect to the initial sale of Class B
and C shares. Class B plan fees payable to Distributors are used by Distributors
to pay third party financing entities that have provided financing to
Distributors in connection with advancing commissions to securities dealers.
The Class B and C plans are compensation plans. They allow each fund to pay a
fee to Distributors that may be more than the eligible expenses Distributors has
incurred at the time of the payment. Distributors must, however, demonstrate to
the board that it has spent or has immediate plans to spend the amount received
on eligible expenses. The fund will not pay more than the maximum amount allowed
under the plans.
Under the Class B plan, the amounts paid by the Equity Fund pursuant to the
plan for the fiscal year ended October 31, 1999, were:
($)
- --------------------------------------------------------------------------------
Advertising 144
Printing and mailing prospectuses
other than to current shareholders 12
Payments to underwriters 132
Payments to broker-dealers 11,073
Other 184
Total 11,545
Under the Class C plan, total payments made by the Convertible Fund to
Distributors for the fiscal year ended October 31, 1999, were $349,520. The
eligible expenses Distributors had incurred to that date were:
($)
Advertising 3,159
Printing and mailing prospectuses
other than to current shareholders 9,072
Payments to underwriters 1,501
Payments to broker-dealers 301,277
Other 6,760
-----------------
Total 321,769
=================
Under the Class C plan, the amounts paid by the Equity Fund and the Global Fund
pursuant to the plan for the fiscal year ended October 31, 1999, were:
EQUITY GLOBAL
($) ($)
- --------------------------------------------------------------------------------
Advertising 12,526 28
Printing and mailing prospectuses
other than to current shareholders 9,171 245
Payments to underwriters 7,922 86
Payments to broker-dealers 807,949 33,619
Other 22,223 575
-------------------------
Total 859,791 34,553
=========================
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, then such payments shall be deemed to have been made
pursuant to the plan.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks may not participate in the plans because of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banks, however, are allowed to receive fees under the plans for
administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board
may reasonably request to enable it to make an informed determination of
whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of each plan also are consistent with Rule 12b-1.
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 a 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 funds
are based on the standardized methods of computing performance mandated by
the SEC. Performance figures reflect Rule 12b-1 fees from the date of the
plan's implementation. An explanation of these and other methods used by the
funds to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical
period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital
gain distributions are reinvested at net asset value. The quotation assumes
the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in a fund. The
average annual total returns for the indicated periods ended October 31,
1999, were:
CLASS A 1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- --------------------------------------------------------------------------------
Convertible Fund 7.65 9.81 11.31
Equity Fund -1.15 12.44 11.46
Global Fund -3.43 6.03 6.33
Short-Intermediate Fund -0.77 5.22 6.10
SINCE
INCEPTION
CLASS B (1/1/99) (%)
- --------------------------------------------------------------------------------
Equity Fund -3.09
SINCE INCEPTION
CLASS C 1 YEAR (%) INCEPTION (%) DATE
- --------------------------------------------------------------------------------
Convertible Fund 11.34 8.33 10/2/95
Equity Fund 2.12 12.10 10/2/95
Global Fund -1.53 5.80 5/1/95
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
Cumulative total return, however, is based on the actual return for a
specified period rather than on the average return over the periods indicated
above. The cumulative total returns for the indicated periods ended October
31, 1999, were:
CLASS A 1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- --------------------------------------------------------------------------------
Convertible Fund 7.65 59.70 192.06
Equity Fund -1.15 79.71 195.99
Global Fund -3.43 34.25 86.66
Short-Intermediate Fund -0.77 28.97 80.82
SINCE
INCEPTION
CLASS B (1/1/99) (%)
- --------------------------------------------------------------------------------
Equity Fund -3.09
SINCE INCEPTION
CLASS C 1 YEAR (%) INCEPTION (%) DATE
- --------------------------------------------------------------------------------
Convertible Fund 11.34 38.64 10/2/95
Equity Fund 2.12 59.44 10/2/95
Global Fund -1.53 30.15 5/1/95
CURRENT YIELD Current yield shows the income per share earned by a fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the
base period.
The yields for the 30-day period ended October 31, 1999, were:
CLASS A (%) CLASS B (%) CLASS C (%)
- --------------------------------------------------------------------------------
Convertible Fund 4.61 N/A 4.10
Equity Fund 2.86 2.30 2.28
Global Fund 6.40 N/A 6.30
Short-Intermediate Fund 5.20 N/A N/A
The following SEC formula was used to calculate these figures:
6
Yield = 2 [(A-B + 1) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in
the quoted current distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current maximum
offering price. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended October 31,
1999, were:
CLASS A (%) CLASS B (%) CLASS C (%)
- --------------------------------------------------------------------------------
Convertible Fund 4.44 N/A 3.93
Equity Fund 2.53 1.99 1.94
Global Fund 4.47 N/A 4.16
Short-Intermediate Fund 4.99 N/A N/A
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a 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 funds also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of a fund as a potential investment for
IRAs, business retirement plans, and other tax-advantaged retirement plans
may quote a total return based upon compounding of dividends on which it is
presumed no federal income tax applies.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in a fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The
average is a combination of the Dow Jones Industrial Average (30 blue-chip
stocks that are generally leaders in their industry), the Dow Jones
Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage
and Yankee bonds.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers(R) and Bloomberg(R) L.P.
o Yields and total return of other taxable investments including CDs, money
market deposit accounts, checking accounts, savings accounts, money market
mutual funds, and repurchase agreements.
o Yields of other countries' government and corporate bonds as compared to
U.S. government and corporate bonds to illustrate the potentially higher
returns available outside the United States.
o IBC's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.
o Salomon Brothers World Government Bond Index, or its component indices.
The World Government Bond Index covers the available market for domestic
government bonds worldwide. It includes all fixed-rate bonds with a
remaining maturity of one year or longer with amounts outstanding of at
least the equivalent of $25 million dollars. The index provides an
accurate, replicable fixed-income benchmark for market performance.
Returns are in local currency.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for a 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 also may compare a fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD
issued by a bank. For example, as the general level of interest rates rise,
the value of a 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 fall. Conversely, when interest rates decrease, the value
of a fund's shares can be expected to increase. CDs are frequently insured by
an agency of the U.S. government. An investment in a fund is not insured by
any federal, state or private entity.
In assessing 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 funds' 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 a fund will continue its performance
as compared to these other averages.
MISCELLANEOUS INFORMATION
- ------------------------------------------------------------------------------
The funds 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 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
a fund cannot guarantee that these goals will be met.
Each fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined
forces with Templeton, a pioneer in international investing. The Mutual
Series team, known for its value-driven approach to domestic equity
investing, became part of the organization four years later. Together, the
Franklin Templeton Group has over $235 billion in assets under management for
more than 5 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 103 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
Nasdaq symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
DESCRIPTION OF RATINGS
- ------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very strong and, in
the majority of instances, differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating also may 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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. 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 for both short-term
debt and commercial paper, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN INVESTORS
SECURITIES TRUST
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2000
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated March 1, 2000, which we may amend from time to time, contains
the basic information you should know before investing in a fund. You should
read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ................................. 2
Risks ................................................ 13
Officers and Trustees ................................ 17
Management and Other Services ........................ 20
Portfolio Transactions ............................... 22
Distributions and Taxes .............................. 22
Organization, Voting Rights and
Principal Holders ................................... 24
Buying and Selling Shares ............................ 25
Pricing Shares ....................................... 27
The Underwriter ...................................... 28
Performance .......................................... 28
Miscellaneous Information ............................ 31
Description of Ratings ............................... 31
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
The Global Fund's investment goal is to provide high current income, consistent
with preservation of capital, with capital appreciation as a secondary
consideration.
The Short-Intermediate Fund's investment goal is to provide as high a level of
current income as is consistent with prudent investing, while seeking
preservation of shareholders' capital.
These goals are fundamental, which means they may not be changed without
shareholder approval.
GLOBAL FUND
The fund seeks to achieve its goal by investing at least 65% of its total assets
in securities issued or guaranteed by domestic and foreign governments and their
political subdivisions, including the U.S. government, its agencies, and
authorities or instrumentalities (U.S. government securities). The fund
considers securities issued by central banks that are guaranteed by their
national governments to be government securities.
The fund selects investments to provide a high current yield and currency
stability, or a combination of yield, capital appreciation, and currency
appreciation consistent with the fund's objective. The fund may also seek to
protect or enhance income, or protect capital, through the use of forward
currency exchange contracts, options, futures contracts, options on futures, and
interest rate swaps, all of which are generally considered "derivative
securities."
The fund will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its objective based upon relative interest rates among currencies, the
outlook for changes in these interest rates, and anticipated changes in
worldwide exchange rates. In considering these factors, the fund will evaluate a
country's economic and political conditions such as inflation rate, growth
prospects, global trade patterns, and government policies.
As a global fund, the fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the euro or the European Currency Unit (ECU).
Under normal economic conditions, the fund invests at least 65% of its total
assets in fixed-income securities such as bonds, notes, and debentures. Some of
the fixed-income securities may be convertible into common stock or be traded
together with warrants for the purchase of common stocks, although the fund has
no current intention of converting such securities into equity or holding them
as equity upon such conversion. The remaining 35% may be invested, to the extent
available and permissible, in equity or debt securities of non-governmental
issuers, foreign or domestic currency deposits, or cash equivalents such as
short-term U.S. Treasury notes or repurchase agreements.
The fund may invest in debt securities with varying maturities. Under current
market conditions, it is expected that the dollar-weighted average maturity of
the fund's investments will not exceed 15 years. Generally, the portfolio's
average maturity will be shorter when the manager expects interests rates
worldwide or in a particular country to rise, and longer when the manager
expects interest rates to fall.
The fund may also invest in other fixed-income securities of both domestic and
foreign issuers including preferred and preference stock and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment trust certificates,
and conditional sales contracts. These fixed-income securities may involve
equity features, such as conversion or exchange rights or warrants for the
acquisition of stock of the same or a different issuer; participation based on
revenues, sales, or profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common stock are offered as a
unit). The fund will limit its investments in warrants, valued at the lower of
cost or market, to 5% of the fund's net assets or to warrants attached to
securities.
The fund may also invest in debt securities of supranational entities
denominated in any currency. A supranational entity is an entity designated or
supported by the national government of one or more countries to promote
economic reconstruction or development. Examples of supranational entities
include, among others, the World Bank, the European Investment Bank, and the
Asian Development Bank. The fund may, in addition, invest in debt securities
denominated in multinational currencies of issuers in any country (including
supranational issuers). The fund is further authorized to invest in
"semi-governmental securities," which are debt securities issued by entities
owned by either a national, state, or equivalent government or are obligations
of a government jurisdiction that are not backed by its full faith and credit
and general taxing powers. U.S. rating agencies do not rate many debt
obligations of foreign issuers, especially developing market issuers, and their
selection for the fund depends on the manager's internal analysis.
SHORT-INTERMEDIATE FUND
The fund intends to invest up to 100% of its net assets in U.S. government
securities and, as a fundamental policy, the fund must invest at least 65% of
its net assets in U.S. government securities.
Government securities are 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 (FNMA), Government National Mortgage Association (GNMA), 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
(FHLMC), or National Credit Union Administration.
The fund may purchase certain U.S. government securities at a discount. These
securities, when held to maturity or retired, may include an element of capital
gain. The fund does not intend to hold securities for the purpose of achieving
capital gains, but will generally hold them as long as current yields on these
securities remain attractive. The fund may realize capital losses when
securities purchased at a premium are held to maturity or are called or redeemed
at a price lower than their purchase price. The fund may also realize capital
gains or losses upon the sale of securities.
MATURITY The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Similarly, the average
life of callable securities will be a function of their stated maturities, call
dates, and the level of interest rates. Estimated average life will be
determined by the fund's manager and used for the purpose of determining the
average weighted maturity of the fund.
CONCENTRATION The fund will not invest more than 25% of the value of its total
assets in any one particular industry.
Below is additional information about the various securities the funds may buy.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in each fund's net asset value per share.
Independent rating organizations rate debt and convertible securities based upon
their assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Below investment grade securities are generally
those rated Ba or lower by Moody's Investors Service, Inc. (Moody's) or BB or
lower by Standard & Poor's Ratings Group (S&P(R)). Please see Description of
Bond Ratings.
The funds will not invest in securities the manager believes involve excessive
risk. If a ratings service changes the rating on a security a fund holds or the
security goes into default, the manager will consider that event in its
evaluation of the overall investment merits of the security but will not
necessarily sell the security.
Ratings, which represent the opinions of the rating services with respect to the
securities and are not absolute standards of quality, will be considered in
connection with the investment of the funds' assets but will not be a
determining or limiting factor. In its investment analysis of securities being
considered for a fund's portfolio, rather than relying principally on the
ratings assigned by rating services, the manager may also consider, among other
things, relative values based on such factors as anticipated cash flow, interest
coverage, asset coverage, earnings prospects, the experience and managerial
strength of the issuer, responsiveness to changes in interest rates and business
conditions, debt maturity schedules and borrowing requirements, and the issuer's
changing financial condition and public recognition thereof.
OTHER FIXED-INCOME SECURITIES The Global Fund may purchase fixed-income
securities of both domestic and foreign issuers including, among others,
preference stock and all types of long-term or short-term debt obligations, such
as equipment trust certificates, equipment lease certificates, and conditional
sales contracts. Equipment-related instruments are used to finance the
acquisition of new equipment. The instrument gives the bond-holder the first
right to the equipment in the event that interest and principal are not paid
when due. Title to the equipment is held in the name of the trustee, usually a
bank, until the instrument is paid off. Equipment-related instruments usually
mature over a period of 10 to 15 years. In practical effect, equipment trust
certificates, equipment lease certificates, and conditional sales contracts are
substantially identical; they differ mainly in legal structure. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales, or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
U.S. GOVERNMENT SECURITIES The funds may invest in U.S. government
securities. U.S. government securities include U.S. Treasury obligations and
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, such as GNMA, which carries a guarantee backed by the full
faith and credit of the U.S. Treasury. GNMA may borrow from the U.S. Treasury
to the extent needed to make payments under its guarantee. No assurances can
be given, however, that the U.S. government will provide financial support to
the obligations of the other U.S. government agencies or instrumentalities in
which the funds may invest, since it is not obligated to do so. These
agencies and instrumentalities are supported by the issuer's right to borrow
an amount limited to a specific line of credit from the U.S. Treasury, the
discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality, or the credit of the agency or
instrumentality.
U.S. government securities do not generally involve the credit risks associated
with other types of interest-bearing securities, and, as a result, the yields
available from such securities are generally lower than the yields available
from other types of interest-bearing securities. Like all interest-bearing
securities, however, the market values of U.S. government securities change as
interest rates fluctuate. In addition, the mortgages underlying GNMAs are
subject to repayment prior to maturity, and in times of falling mortgage
interest rates premature repayments may be more likely. To the extent GNMAs held
by a 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.
CALLABLE SECURITIES These structures give the issuer the right to redeem the
security on a given date or dates (known as the call dates) prior to maturity.
In return, these securities typically offer a higher yield. The period of call
protection between the time of issue and the first call date varies from
security to security. Documentation for callable securities usually requires
that investors be notified of a call within a prescribed period of time.
Issuers typically exercise call options in periods of declining interest rates,
thereby creating reinvestment risk for the investor. On the other hand, if an
investor expects a security to be called and it is not, the investor faces an
effective maturity extension. Certain securities may be called only in whole
(the entire security is redeemed), while others may be called in part (a portion
of the total face value is redeemed) and possibly from time to time as
determined by the issuer.
MORTGAGE SECURITIES Mortgage securities represent an ownership interest in
mortgage loans made by banks and other financial institutions to finance
purchases of homes, commercial buildings or other real estate. These mortgage
loans may have either fixed or adjustable interest rates. The individual
mortgage loans are packaged or "pooled" together for sale to investors. As the
underlying mortgage loans are paid off, investors receive principal and interest
payments.
A mortgage-backed security is an interest in a pool of mortgage loans. The
primary issuers or guarantors of these securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage-backed securities from pools of government guaranteed or
insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks, and savings and loan
associations. FNMA and FHLMC issue mortgage securities from pools of
conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including savings and loan associations, savings
banks, commercial banks, credit unions, and mortgage bankers. The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. Mortgage securities from FNMA and FHLMC are
not backed by the full faith and credit of the U.S. government. FNMA guarantees
full and timely payment of all interest and principal, and FHLMC guarantees
timely payment of interest and the ultimate collection of principal. Securities
issued by FNMA are supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. Securities issued by FHLMC are supported
only by the credit of the agency. There is no guarantee that the government
would support government agency securities and, accordingly, they may involve a
risk of non-payment of principal and interest. Nonetheless, because FNMA and
FHLMC are instrumentalities of the U.S. government, these securities are
generally considered to be high quality investments having minimal credit risks.
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.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly payments consisting of a pro rata share of
both regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool (less GNMA's, FHLMC's, or FNMA's
fees and any applicable loan servicing fees).
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage-backed securities nor do they extend to the value
of the fund's shares. In general, the value of fixed-income securities varies
with changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas coupon rates
of adjustable rate mortgage securities move with market interest rates, and thus
their value tends to fluctuate to a lesser degree. In view of these factors, the
ability of a fund to obtain a high level of total return may be limited under
varying market conditions.
FOREIGN SECURITIES Investments may be in securities of foreign issuers, whether
located in developed or undeveloped countries, but investments will not be made
in any securities issued without stock certificates or comparable stock
documents. The Global Fund does not consider any security that it acquires
outside the U.S. and that is publicly traded in the U.S., on a foreign
securities exchange, or in a foreign securities market to be illiquid so long as
the fund acquires and holds the security with the intention of re-selling the
security in the foreign trading market, the fund reasonably believes it can
readily dispose of the security for cash in the U.S. or foreign market, and
current market quotations are readily available.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign investments.
OBLIGATIONS OF DEVELOPING COUNTRIES The Global Fund may invest in the
fixed-income obligations of governments, government agencies, and corporations
of developing countries. As of the date of this SAI, such opportunities are
limited as many developing countries are rescheduling their existing loans and
obligations. However, as restructuring is completed and economic conditions
improve, these obligations may become available at discounts and offer the
Global Fund the potential for current U.S. dollar income. These instruments are
not traded on any exchange. However, the manager believes there may be a market
for such securities either in multinational companies wishing to purchase such
assets at a discount for further investment, or from the issuing governments
which may decide to redeem their obligations at a discount.
ZERO COUPON BONDS The Short-Intermediate Fund may invest in zero coupon bonds
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
Zero coupon bonds are debt obligations that are issued at a significant discount
from face value. The original discount approximates the total amount of interest
the bonds will accrue and compounds over the period until maturity or the first
interest accrual date at a rate of interest reflecting the market rate of the
security at the time of issuance. The fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy the fund's
distribution obligations.
EQUITY SECURITIES Equity securities generally entitle the holder to participate
in a company's general operating results. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock, as
well as securities convertible into common stocks. Preferred stockholders
typically receive priority in the distribution of dividends over common
stockholders but may receive less appreciation than common stockholders.
Preferred stockholders may also have greater voting rights as to certain issues
as well. Equity securities may also include convertible securities, warrants, or
rights. Warrants or rights give the holder the right to buy a common stock at a
given time for a specified price.
BANK SECURITIES The Global Fund may invest in obligations of domestic and
foreign banks which, at the date of investment, have total assets (as of the
date of their most recently published financial statements) in excess of one
billion dollars (or foreign currency equivalent at then-current exchange rates).
LOAN PARTICIPATIONS The Global Fund may acquire loan participations in which the
fund will buy from a lender a portion of a larger loan that the lender has made
to a borrower. Generally, loan participations are sold without guarantee or
recourse to the lending institution and are subject to the credit risks of both
the borrower and the lending institution. Loan participations, however, may
enable the fund to acquire an interest in a loan from a financially strong
borrower, which the fund could not do directly.
Loan participations may have speculative characteristics. The Global Fund may
purchase loan participations at par or which sell at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the loan participation may appreciate in value but not beyond par
value.
The Global Fund may acquire loan participations that sell at a discount, from
time to time, when it believes the investments offer the possibility of
long-term appreciation in value in addition to current income. An investment in
loan participations carries a high degree of risk and may have the consequence
that interest payments with respect to such securities may be reduced, deferred,
suspended, or eliminated and may have the further consequence that principal
payments may likewise be reduced, deferred, suspended, or cancelled, causing the
loss of the entire amount of the investment. The Global Fund generally will
acquire loans from a bank, finance company, or other similar financial services
entity (Lender).
Loan participations are interests in floating- or variable-rate senior loans
(Loans) to U.S. corporations, partnerships, and other entities (Borrowers). The
Loans typically have the most senior position in a Borrower's capital structure,
although some Loans may hold an equal ranking with other senior securities of
the Borrower. Although the Loans generally are secured by specific collateral,
the Global Fund may invest in Loans that are not secured by any collateral.
Uncollateralized Loans pose a greater risk of nonpayment of interest or loss of
principal than do collateralized Loans. The collateral underlying a
collateralized Loan may consist of assets that may not be readily liquidated,
and there is no assurance that the liquidation of such assets would fully
satisfy a Borrower's obligation under a Loan. The Global Fund is not subject to
any restrictions with respect to the maturity of the Loans in which it purchases
participation interests.
Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the manager may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative factor
in the manager's analysis.
Loans are not readily marketable and may be subject to restrictions on resale.
Any secondary purchases and sales of loan participations generally are conducted
in private transactions between buyers and sellers.
When acquiring a loan participation, the Global Fund will have a contractual
relationship only with the Lender (typically an entity in the banking, finance,
or financial services industries), not with the Borrower. The Global Fund has
the right to receive payments of principal and interest to which it is entitled
only from the Lender selling the loan participation and only upon receipt by the
Lender of payments from the Borrower. In connection with purchasing loan
participations, the Global Fund generally will have no right to enforce
compliance by the Borrower with the terms of the Loan Agreement, nor any rights
with respect to any funds acquired by other Lenders through set-off against the
Borrower, and the Fund may not directly benefit from the collateral supporting
the Loan in which it has purchased the loan participation. As a result, the
Global Fund may assume the credit risk of both the Borrower and the Lender
selling the loan participation. In the event of the insolvency of the Lender
selling a loan participation, the Global Fund may be treated as a general
creditor of the Lender, and may not benefit from any set-off between the Lender
and the Borrower.
CASH MANAGEMENT To the extent the funds' manager believes it to be desirable or
expedient under then-existing market conditions, the funds may keep a portion of
their assets in cash or cash equivalents including Treasury bills, commercial
paper, repurchase agreements and short-term bank obligations such as
certificates of deposit (CDs) and bankers' acceptances. To the extent permitted
by exemptions granted under the Investment Company Act of 1940, as amended (1940
Act), and the fund's other investment policies and restrictions, the Global Fund
also may invest in shares of one or more money market funds managed by Franklin
Advisers, Inc. or its affiliates.
TEMPORARY INVESTMENTS When the funds' manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, it may invest each
fund's portfolio in a temporary defensive manner.
When the manager believes the Global Fund's portfolio should be invested in a
temporary defensive manner, the fund may have less than 25% of its assets in
foreign government securities. The fund may invest instead in U.S. government
securities, cash (including foreign currency) and cash equivalents including,
but not limited to, CDs, commercial paper, short-term notes and repurchase
agreements. The fund also may invest in shares of one or more money market funds
managed by Franklin Advisers, Inc. or its affiliates. For defensive purposes,
the Global Fund may invest a larger portion of its assets in U.S.
dollar-denominated obligations to help reduce the risks inherent in obligations
denominated in currencies other than the U.S. dollar.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 30% of the value of the Global Fund's total assets and 10%
of the value of the Short-Intermediate Fund's total assets, measured at the time
of the most recent loan. For each loan, the borrower must maintain with the
fund's custodian collateral (consisting of cash) with a value at least equal to
102% of the current market value of the loaned securities. The fund retains all
or a portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund also continues to receive any
distributions paid on the loaned securities. The fund may terminate a loan at
any time and obtain the return of the securities loaned within the normal
settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. Each fund will loan its securities only
to parties who meet creditworthiness standards approved by the fund's board of
trustees, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
WHEN-ISSUED SECURITIES The Global Fund may purchase securities on a
"when-issued" or "forward-delivery" basis, and the Short-Intermediate Fund may
buy obligations on a when-issued or "delayed-delivery" basis, which means that
the obligations will be delivered at a future date. Although the funds are not
limited in the amount of securities they may commit to buy on such basis, it is
expected that under normal circumstances the Global Fund will not commit more
than 30% of its assets to such purchases. The 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. A 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 Each fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
REVERSE REPURCHASE AGREEMENTS The Global Fund may also enter into reverse
repurchase agreements, which are the opposite of repurchase agreements but
involve similar mechanics and risks. The Global Fund sells securities to a bank
or dealer and agrees to repurchase them at a mutually agreed price and date.
Cash or liquid high-grade debt securities having an initial market value,
including accrued interest, equal to at least 102% of the dollar amount sold by
the Global Fund are segregated as collateral and marked-to-market daily to
maintain coverage of at least 100%. A default by the purchaser might cause the
Global Fund to experience a loss or delay in the liquidation costs. The Global
Fund intends to enter into reverse repurchase agreements with domestic or
foreign banks or securities dealers. The manager will evaluate the
creditworthiness of these entities prior to engaging in such transactions, under
the general supervision of the fund's board of trustees.
BORROWING The Global Fund may borrow from banks, for temporary or emergency
purposes only, up to 30% of its total assets, and pledge up to 30% of its total
assets in connection therewith. The Global Fund will not make new investments
while any outstanding borrowings exceed 5% of its total assets. The
Short-Intermediate Fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow from banks for temporary or emergency purposes
up to 5% of its total assets and pledge up to 5% of its total assets in
connection therewith.
ILLIQUID INVESTMENTS Each fund's policy is not to invest more than 10% of its
net assets in illiquid securities. The Short-Intermediate Fund has not purchased
and does not intend currently to purchase illiquid or restricted securities.
Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which the
fund has valued them.
Illiquid investments include, among other things, repurchase agreements of more
than seven days duration, over-the-counter options and the assets used to cover
such options, and other securities which are not readily marketable. Investments
in savings deposits are generally considered illiquid and will, together with
other illiquid investments, not exceed 10% of each fund's total net assets.
Notwithstanding this limitation, the board has authorized each fund to invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933, as amended (1933 Act) (restricted
securities), where such investment is consistent with the fund's investment
objective and has authorized such securities to be considered liquid to the
extent the manager determines that there is a liquid institutional or other
market for such securities. For example, restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the 1933 Act and for which a liquid institutional market has developed
will be considered liquid even though such securities have not been registered
pursuant to the 1933 Act.
The board will review any determination by the manager to treat a restricted
security as a liquid security on an ongoing basis, including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, the manager and the board will take into account the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent a fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
CURRENCY TECHNIQUES AND HEDGING The Global Fund may invest in options, futures,
options on futures, and forward contracts, although the fund has no present
intention of using any of these techniques except forward contracts. While there
are no specific limits on the fund's use of these practices other than those
limits stated below, the fund only engages in these practices for hedging
purposes, or in other words for the purpose of protecting against declines in
the value of the fund's portfolio securities and the income on these securities.
The production of additional income may at times be a secondary purpose of these
practices.
FORWARD CURRENCY EXCHANGE CONTRACTS The Global Fund may enter into forward
currency exchange contracts (forward contracts) to attempt to minimize the risk
to the fund from adverse changes in the relationship between currencies or to
enhance income. A forward contract is an obligation to buy or sell a specific
currency for an agreed price at a future date that is individually negotiated
and privately traded by currency traders and their customers.
The fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
The fund may also enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell an amount of that foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency. Similarly, when the fund believes that the U.S. dollar may
suffer a substantial decline against a foreign currency, it may enter into a
forward contract to buy that foreign currency for a fixed dollar amount.
The fund sets aside or segregates sufficient cash, cash equivalents, or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of the fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the ability
of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.
The board has adopted the requirement that the Global Fund may only use futures
contracts and options on futures contracts for hedging purposes and not for
speculation. In addition, the Global Fund will not buy or sell futures contracts
and options on futures contracts if immediately thereafter the amount of initial
margin deposits on all the futures positions of the fund and premiums paid on
options on futures contracts would exceed 5% of the market value of the total
assets of the fund.
OPTIONS ON FOREIGN CURRENCIES The Global Fund may buy and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities or other assets to be acquired. As in the case
of other kinds of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received.
The fund could be required to buy or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the fund's position,
the fund may forfeit the entire amount of the premium plus related transaction
costs.
DERIVATIVE SECURITIES
Although the Global Fund has no present intention of investing in the following
types of securities, the fund may invest in the securities described below.
These securities are generally considered "derivative securities."
OPTIONS Although the Global Fund's present policy, which may be changed without
shareholder approval, is not to invest in options on securities, the fund may
write covered put and call options and buy put and call options on U.S. or
foreign securities that are traded on U.S. and foreign securities exchanges and
in over-the-counter markets.
The risks of the Global Fund's transactions in options on foreign exchanges are
similar to the risks of investing in foreign securities. In addition, a foreign
exchange may impose different exercise and settlement terms, procedures, and
margin requirements than a U.S. exchange.
The Global Fund may buy put options to hedge against a decline in the value of
its portfolio. By using put options in this way, the fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of the
premium paid for the put option plus transaction costs.
The Global Fund may buy call options to hedge against an increase in the price
of securities that the fund anticipates purchasing in the future. The premium
paid for the call option plus any transaction costs will reduce any benefit the
Global Fund may realize upon exercise of the option. Unless the price of the
underlying security rises sufficiently, the option may expire resulting in a
loss to the Global Fund equal to the cost of the options.
The ability of the Global Fund to engage in options transactions is subject
to the following limitations: a) the fund may not invest more than 5% of its
total assets in options (including straddles and spreads); b) the obligations
of the fund under put options written by the fund may not exceed 50% of the
fund's net assets; and c) the aggregate premiums on all options purchased by
the fund may not exceed 20% of its net assets.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the buyer of the option the right to buy and
obligates the writer of the option to sell the underlying security at the
exercise price at any time during the option period, regardless of the market
price of the underlying security. The buyer of an option pays a cash premium
that typically reflects, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand factors, and interest rates.
When the fund writes or sells covered call options, it will receive a cash
premium which can be used in whatever way is felt to be most beneficial to the
fund. The risk associated with covered option writing is that in the event of a
price rise on the underlying security which would likely trigger the exercise of
the call option, the fund will not participate in the increase in price beyond
the exercise price.
A put option gives the holder the right to sell the underlying security at the
option exercise price at any time during the option period. The fund may pay for
a put either separately or by paying a higher price for securities that are
purchased subject to a put, thereby increasing the cost of the securities and
reducing the yield otherwise available from the same securities.
The writer of an option who wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. If the Global Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security. However, a writer or holder of an option may not effect a closing
transaction after being notified of the exercise of the option.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option. The fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option.
Effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
fund investments. There is no guarantee in any particular situation that either
a closing purchase or a closing sale transaction can be effected. If the fund is
unable to effect a closing purchase transaction in a secondary market with
respect to options it has written, it will not be able to sell the underlying
security or other asset covering the option until the option expires or it
delivers the underlying security or asset upon exercise.
The writer of an option may have no control over when the underlying securities
must be sold in the case of a call option, or purchased in the case of a put
option, since the writer of certain options may be assigned an exercise notice
at any time prior to the expiration of the option. Whether or not an option
expires unexercised, the writer retains the amount of the premium.
There is no assurance that a liquid market will exist for a given option at any
particular time. During the option period, if the fund has written a covered
call option, it will have given up the opportunity to profit from a price
increase in the underlying securities above the exercise price in return for the
premium on the option. However, as long as its obligation as a writer continues,
the fund will have retained the risk of loss should the price of the underlying
security decline.
The Global Fund may write options in connection with "buy-and-write"
transactions; that is, the fund may purchase a security and then write a call
option against that security. The exercise price of the call will depend upon
the expected price movement of the underlying security. The exercise price of a
call option may be below ("in-the-money"), equal to ("at-the-money"), or above
("out-of-the-money") the current value of the underlying security at the time
the option is written.
INTEREST RATE SWAPS The Global Fund may participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest rate
obligations, one of which has an interest rate fixed to maturity, while the
other has an interest rate that changes in accordance with changes in a
designated benchmark (i.e., LIBOR, prime, commercial paper, or other
benchmarks). The obligations to make repayment of principal on the underlying
securities are not exchanged. These transactions generally require the
participation of an intermediary, frequently a bank.
Interest rate swaps permit a party seeking a floating rate obligation to acquire
the obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed-rate obligation to acquire the
obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed-rate obligations at a low enough coupon rate to cover the
cost involved.
FUTURES CONTRACTS The Global Fund may enter into contracts for the purchase or
sale for future delivery of debt securities or currency (futures contracts). A
sale of a futures contract means the acquisition and assumption of a contractual
obligation to deliver the securities or currency called for by the contract at a
specified price on a specified date. A purchase of a futures contract means the
acquisition of a contractual right and obligation to acquire the securities or
currency called for by the contract at a specified price on a specified date.
The Global Fund will enter into futures contracts that are based on foreign
currencies or on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury bonds, Treasury notes, GNMA
modified pass-through mortgage-backed securities, and three-month U.S. Treasury
bills. The Global Fund may also enter into futures contracts that are based on
corporate securities and non-U.S. government debt securities when such
securities become available.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is terminated before the settlement date of the contract without having to make
or take delivery of the securities or currency. The termination of a contractual
obligation is accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical offsetting futures contract calling for
delivery in the same month. Such a transaction cancels the obligation to make or
take delivery of the underlying security or currency. Since all transactions in
the futures market are made, offset, or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Global Fund
will incur brokerage fees when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash (securities) or foreign currency
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets are
subject to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash (securities) or foreign currency and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by the manager may still not result in a successful hedging transaction.
OPTIONS ON FUTURES CONTRACTS The Global Fund intends to purchase and write
options on futures contracts for hedging purposes only. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security or currency. Depending on the pricing of
the option compared to either the price of the futures contract upon which it is
based or the price of the underlying debt securities or currency, it may or may
not be less risky than direct ownership of the futures contract of the
underlying debt securities or currency. As with the purchase of futures
contracts, when the Global Fund is not fully invested, it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates or appreciation in the value of a foreign currency against the
U.S. dollar.
If the Global Fund writes a call option on a futures contract and the futures
price at expiration of the option is below the exercise price, the fund will
retain the full amount of the option premium, which may provide a partial hedge
against any decline that may have occurred in the value of the fund's portfolio
holdings. If the futures price at expiration of the option is higher than the
exercise price, the Global Fund will retain the full amount of the option
premium, which may provide a partial hedge against any increase in the price of
securities which the fund intends to purchase. If a put or call option the
Global Fund has written is exercised, the fund will incur a loss, which will be
reduced by the amount of the premium it received. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Global Fund's losses from existing
options on futures may to some extent be reduced or increased by changes in the
value of its portfolio securities.
The Global Fund's ability to engage in the options on futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options on futures are relatively new and still
developing, and it is impossible to predict the amount of trading interest that
may exist in various types of options on futures. Therefore, no assurance can be
given that the Global Fund will be able to use these instruments effectively for
the purposes set forth above. Furthermore, the Global Fund's ability to engage
in options on futures transactions may be limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES The Global Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
As with other types of options, however, the benefit the Global Fund derives
from purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Global Fund
could sustain losses on transactions in foreign currency options that would
require the fund to forego a portion or all of the benefits of advantageous
changes in such rates.
The Global Fund may also write options on foreign currencies for hedging
purposes. As with other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium received, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Global Fund would be required to
purchase or sell the underlying currency at a loss, which may not be fully
offset by the amount of the premium received. As a result of writing options on
foreign currencies, the Global Fund may also be required to forego all or a
portion of the benefits that might otherwise have been obtained from favorable
changes in currency exchange rates.
All call options written on foreign currencies will be covered.
The Global Fund proposes to take advantage of investment opportunities in the
area of options, futures contracts, and options on futures contracts that are
not presently contemplated for use by the fund or that are not currently
available but may be developed in the future, to the extent such opportunities
are both consistent with the fund's investment objective and policies and are
legally permissible transactions for the fund. These opportunities, if they
arise, may involve risks that are different from those involved in the options
and futures activities described above.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Global Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the fund, except that
it may borrow from banks, for temporary or emergency purposes, up to 30% of its
total assets and pledge up to 30% of its total assets in connection therewith.
(No new investments will be made by the fund while any outstanding borrowings
exceed 5% of its total assets.)
2. Buy any securities on "margin," except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities and except that the fund may make margin deposits in connection
with futures contracts and options on futures contracts.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
portfolio securities of the fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 30% of the value of the fund's total assets
(taken at market value) at the time of the most recent loan. Also, entry into
repurchase agreements is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 25% of its assets in the securities of issuers in any one
industry, other than foreign governments.
6. Purchase from or sell any portfolio securities to its officers and trustees,
or any firm of which any officer or trustee is a member, as principal, except
that the fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; retain securities of any issuer, if to the knowledge of
the fund, one or more of its officers, trustees or the investment manager own
beneficially more than one-half of 1% of the securities of such issuer and all
such persons together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
8. Invest in interests in oil, gas or other mineral exploration or development
programs.
9. Invest in companies for the purpose of exercising control or management.
10. Make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such securities
or securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to, the
securities sold short (short sales against the box), and unless not more than
10% of the fund's net assets (taken at market value) is held as collateral for
such sales at any one time.
The Global Fund presently has the following additional restrictions, which are
not fundamental and may be changed without shareholder approval.
The Global Fund may not:
1. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
2. Buy securities of other investment companies except in accordance with the
1940 Act, and except that the fund may invest its assets in shares of one or
more money market funds managed by Franklin Advisers, Inc. or its affiliates, to
the extent permitted by exemptions granted under the 1940 Act.
3. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures contracts, forward contracts or repurchase transactions.
The Short-Intermediate Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of the fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of the fund's total assets
at the time of the most recent loan. The entry into repurchase agreements is not
considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar as
the fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of the fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer. To the
extent permitted by exemptions granted under the 1940 Act, the fund may invest
in shares of money market funds managed by the manager or its affiliates.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer if, to the knowledge of the trust, one or more
of its officers, trustees or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. At present, there are no options listed for
trading on a national securities exchange covering the types of securities which
are appropriate for investment by the fund and, therefore, there are no option
transactions available for the fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition, or reorganization; or except to the extent
the fund invests its uninvested daily cash balances in shares of the Franklin
Money Fund and other money market funds in the Franklin Templeton 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 goal and
policies of the fund.
The Global Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
funds intend to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when a fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
RISKS
- --------------------------------------------------------------------------------
DEBT SECURITIES Debt securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to factors such as interest rate
sensitivity, market perception of the creditworthiness of the issuer, and
general market liquidity (market risk). Debt obligations will tend to decrease
in value when prevailing interest rates rise and increase in value when
prevailing interest rates fall. Generally, long-term debt obligations are more
sensitive to interest rate fluctuations than short-term obligations. Because
investments in debt obligations are interest rate sensitive, a fund's
performance may be affected by the manager's ability to anticipate and respond
to fluctuations in market interest rates, to the extent of the fund's investment
in debt obligations.
MORTGAGE SECURITIES The Short-Intermediate Fund's investment in mortgage-backed
securities differs from conventional debt securities because principal is paid
back over the life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal due to voluntary prepayments, refinancing
or foreclosure on the underlying mortgage loans. During periods of declining
interest rates, the volume of principal prepayments generally increases as
borrowers refinance their mortgages at lower rates. The fund may be forced to
reinvest returned principal at lower interest rates, reducing the fund's income.
For this reason, mortgage-backed securities may be less effective than other
types of securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other investments with similar maturities. A reduction in the
anticipated rate of principal prepayments, especially during periods of rising
interest rates, may increase the effective maturity of mortgage-backed
securities, making them more susceptible than other debt securities to a decline
in market value when interest rates rise. This could increase the volatility of
the fund's returns and share price.
To the extent mortgage securities are purchased at a premium, unscheduled
principal prepayments, including prepayments resulting from mortgage
foreclosures, may result in some loss of the holder's principal investment to
the extent of the premium paid. On the other hand, if mortgage securities are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current and total returns and
will accelerate the recognition of income which, when distributed to you, will
be taxable as ordinary income.
LOWER RATED SECURITIES Because the Global Fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that is
present with an investment in higher risk securities, such as those in which the
Global Fund invests. Accordingly, an investment in the Global Fund should not be
considered a complete investment program and should be carefully evaluated for
its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the unavailability of
additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Global Fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities tend
to lose much of their value before they default. Thus, the Global Fund's net
asset value may be adversely affected before an issuer defaults. In addition,
the Global Fund may incur additional expenses if it must try to recover
principal or interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more difficult
for a fund to manage the timing of its income. To generate cash to satisfy these
distribution requirements, the Global Fund may have to sell portfolio securities
that it otherwise may have continued to hold or use cash flows from other
sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Global Fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Global Fund
portfolio.
The Global Fund may buy high yield, fixed-income securities that are sold
without registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold with
registration rights, covenants, and penalty provisions for delayed registration,
if the Global Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The Global Fund may also incur special costs
in disposing of restricted securities, although the Global Fund will generally
not incur any costs when the issuer is responsible for registering the
securities.
The Global Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The Global Fund does not have an arrangement with its
underwriter or any other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Global Fund's net asset
value.
The Global Fund relies on the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, and regulatory matters.
NON-DIVERSIFICATION Because the Global Fund is non-diversified, there is no
restriction on the percentage of its assets that it may invest at any time in
the securities of any issuer. Nevertheless, the Global Fund's non-diversified
status may expose it to greater risk or volatility than diversified funds with
otherwise similar investment policies, since the fund may invest a larger
portion of its assets in securities of a small number of issuers.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the Global Fund. These risks can be significantly greater for
investments in emerging markets.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), restrictions on removal of assets, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
Certain countries' financial markets and services are less developed than those
in the U.S. or other major economies. Settlement practices may be cumbersome and
result in delays that may affect portfolio liquidity. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies, and obtaining judgments with respect to foreign investments in foreign
courts than with respect to domestic issuers in U.S.
courts.
The Global Fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the fund's
ability to meet a large number of shareholder redemption requests in the event
of economic or political turmoil in a country in which the fund has a
substantial portion of its assets invested or deterioration in relations between
the U.S. and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict the fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (viii) foreign taxation; (ix)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (x)
the absence of a capital market structure or market-oriented economy; and (xi)
the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events.
In addition, many countries in which the Global Fund may invest have experienced
substantial, and in some periods, extremely high rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
CURRENCY The Global Fund's management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread in currency
exchange (to cover service charges) may be incurred, particularly when the fund
changes investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source.
The Global Fund may be affected either unfavorably or favorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Certain
currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the Global Fund's portfolio
securities are denominated may have a detrimental impact on the fund. The fund's
manager endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where, from time to time, it places
the fund's investments.
Any investments by the Global Fund in foreign securities where delivery takes
place outside the U.S. will be made in compliance with applicable U.S. and
foreign currency restrictions and other tax laws and laws limiting the amount
and types of foreign investments. Although current regulations do not, in the
opinion of the fund's manager, limit seriously the fund's investment activities,
if they were changed in the future they might restrict the ability of the fund
to make its investments or tend to impair the liquidity of the fund's
investments. Changes in governmental administrations, economic or monetary
policies in the U.S. or abroad, or circumstances in dealings between nations
could result in investment losses for the fund and could adversely affect the
fund's operations.
The fund's board considers at least annually the likelihood of the imposition by
any foreign government of exchange control restrictions that would affect the
liquidity of the Global Fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The board also considers the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories. However, in the absence of willful
misfeasance, bad faith, or gross negligence on the part of the fund's manager,
any losses resulting from the holding of the Global Fund's portfolio securities
in foreign countries and/or with securities depositories will be at the risk of
the shareholders. No assurance can be given that the board's appraisal of the
risks will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
The Global Fund may invest in debt securities denominated in U.S. and foreign
currencies. A change in the value of any foreign currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Global Fund's assets denominated in the foreign currency. These changes will
also affect the Global Fund's yield, income, and distributions to shareholders.
In addition, although the Global Fund receives income in various currencies, the
fund is required to compute and distribute its income in U.S. dollars.
Therefore, if the exchange rate for any currency depreciates after the Global
Fund's income has been accrued and translated into U.S. dollars, the fund could
be required to liquidate portfolio securities to make its distributions.
Similarly, if an exchange rate depreciates between the time the Global Fund
incurs expenses in U.S. dollars and the time the expenses are paid, the amount
of a currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency at the time the expenses were incurred. The Global Fund will only
invest in foreign currency denominated debt securities of countries whose
currency is fully exchangeable into U.S. dollars without legal restriction at
the time of investment.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
OPTIONS ON SECURITIES RISK The writing of covered put options is similar in
terms of risk/return characteristics to buy-and-write transactions. If the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and a fund's gain will be limited to
the premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Global Fund may elect to close the
position or wait for the option to be exercised and take delivery of the
security at the exercise price. The fund's return will be the premium received
from the put option minus the amount by which the market price of the security
is below the exercise price. The Global Fund may use out-of-the-money,
at-the-money, and in-the-money put options in the same market environments in
which it uses call options in equivalent buy-and-write transactions.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the Global Fund as an option writer could lose amounts substantially
in excess of its initial investment, due to the margin and collateral
requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the U.S. Securities and Exchange Commission (SEC), as are other
securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all option positions entered into on a
national securities exchange are cleared and guaranteed by the Options Clearing
Corporation, thereby reducing the risk of counterparty default. Further, a
liquid secondary market in options traded on a national securities exchange may
be more readily available than in the over-the-counter market, potentially
permitting the fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
In regard to the Global Fund's option trading activities, it intends to comply
with the California Corporate Securities Rules as they pertain to prohibited
investments. The Global Fund's option trading activities may result in the loss
of principal under certain market conditions.
FUTURES CONTRACTS Futures contracts entail certain risks. Although the Global
Fund believes that the use of futures contracts will benefit the fund, if the
manager's investment judgment about the general direction of interest or
currency exchange rates is incorrect, the fund's overall performance would be
poorer than if it had not entered into any such contract. For example, if the
Global Fund has hedged against the possibility of an increase in interest rates
that would adversely affect the price of bonds held in its portfolio and
interest rates decrease instead, the fund will lose part or all of the benefit
of the increased value of the bonds which it has hedged because it will have
offsetting losses in its futures positions. Similarly, if the Global Fund sells
a foreign currency futures contract and the U.S. dollar value of the currency
unexpectedly increases, the fund will lose the beneficial effect of the increase
on the value of the security denominated in that currency. In addition, in such
situations, if the Global Fund has insufficient cash, it may have to sell bonds
from its portfolio to meet daily variation margin requirements. Sales of bonds
may be, but are not necessarily, at increased prices that reflect the rising
market. The Global Fund may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS The amount of risk the Global Fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value of
the option purchased. The Global Fund will purchase a put option on a futures
contract only to hedge the fund's portfolio against the risk of rising interest
rates or the decline in the value of securities denominated in a foreign
currency.
FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, AND OPTIONS ON FUTURES
CONTRACTS Forward contracts are not traded on contract markets regulated by the
Commodity Futures Trading Commission (CFTC) or by the SEC. The ability of the
Global Fund to use forward contracts could be restricted to the extent that
Congress authorizes the CFTC or the SEC to regulate such transactions. Forward
contracts are traded through financial institutions acting as market makers.
The purchase and sale of exchange-traded foreign currency options are subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, margins of options written, the nature of the
foreign currency market, possible intervention by governmental authorities, and
the effects of other political and economic events.
Futures contracts on currencies, options on futures contracts, and options on
foreign currencies may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions could also be adversely
affected by (i) other foreign political and economic factors, (ii) less
available data than in the U.S. on which to base trading decisions, (iii) delays
in the Global Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition of exercise
and settlement terms and procedures, and margin requirements different from
those in the U.S., and (v) lesser trading volume.
OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
S. Joseph Fortunato (67)
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman
(1995-1997) and Trustee (1993-1997), National Child Research Center, Assistant
to the President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
*Edward B. Jamieson (51)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
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 51 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Reclamation (redevelopment); director or trustee, as
the case may be, of 27 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee, as
the case may be, of 47 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chairman, White River Corporation (financial
services) (until 1998) and Hambrecht and Quist Group (investment banking)(until
1992), President, National Association of Securities Dealers, Inc. (until 1987).
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton Services,
Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin
Investment Advisory Services, Inc. and 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 51 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 51 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Senior Vice
President and General Counsel, Franklin Resources, Inc., Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.,
Executive Vice President, Franklin Advisers, Inc., Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC, and Vice President,
Chief Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 51 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 33 of the investment companies in the Franklin
Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 51 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM GROUP ON WHICH
NAME THE TRUST1($) OF FUNDS2($) EACH SERVES3
- --------------------------------------------------------------------------------
Frank Abbott, III 10,209 156,060 27
Harris Ashton 11,227 363,165 47
S. Joseph Fortunato 10,459 363,238 49
Edith E. Holiday 12,900 237,265 24
Frank W.T. LaHaye 10,209 156,060 27
Gordon Macklin 11,227 363,165 47
1. For the fiscal year ended October 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The manager also
selects the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the funds. Similarly, with respect to the
funds, the manager is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the funds or other
funds it manages.
Each fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
The Global Fund's sub-advisor is Templeton Investment Counsel, Inc., through its
Global Bond Managers division. The sub-advisor has an agreement with the manager
and provides the manager with investment management advice and assistance. The
sub-advisor furnishes, subject to the manager's discretion, a portion of the
investment advisory services for which the manager is responsible pursuant to
the management agreement. These responsibilities may include managing a portion
of the Global Fund's investments and supplying research services. The
sub-advisor's activities are subject to the board's review and control, as well
as the manager's instruction and supervision.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% of the value of net assets up to and including $100 million;
o 1/24 of 1% of the value of net assets over $100 million and not over
$250 million; and
o 9/240 of 1% of the value of net assets in excess of $250 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a fund's
shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
-------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Global Fund 639,062 722,502 785,629
Short-Intermediate Fund 1,128,453 1,118,373 1,076,296
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.35% of the average monthly net assets up to and including $100
million;
o 0.25% of the average monthly net assets over $100 million and not over
$250 million; and
o 0.20% of the average monthly net assets in excess of $250 million.
The manager pays this fee from the management fees it receives from the Global
Fund. For the last three fiscal years ended October 31, the manager paid the
following sub-advisory fees:
SUB-ADVISORY
FEES PAID ($)
- --------------------------------------------------------------------------------
1999 357,031
1998 397,509
1997 428,496
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
--------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Global Fund 154,285 179,253 215,869
Short-Intermediate Fund 301,462 296,460 310,121
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The funds
also will 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 funds. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the funds' independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Since most purchases by the fund are principal transactions at net prices, the
fund incurs little or no brokerage costs. The fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the manager to supplement its own research and analysis
activities and to receive the views and information of individuals and research
staffs of other securities firms. As long as it is lawful and appropriate to do
so, the manager and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the fund's officers are
satisfied that the best execution is obtained, the sale of fund shares, as well
as shares of other funds in the Franklin Templeton Group of Funds, also may be
considered a factor in the selection of broker-dealers to execute the fund's
portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. To recapture brokerage for the benefit of the fund, any portfolio
securities tendered by the fund will be tendered through Distributors if it is
legally permissible to do so. In turn, the next management fee payable to the
manager will be reduced by the amount of any fees received by Distributors in
cash, less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the fiscal years ended October 31, 1999, 1998 and 1997, the funds did not
pay any brokerage commissions.
For the fiscal year ended October 31, 1999, the Short-Intermediate Fund paid
brokerage commissions of $56,457 from aggregate portfolio transactions of
$20,921,449 to brokers who provided research services. For the fiscal year ended
October 31, 1999, the Global Fund did not pay brokerage commissions to brokers
who provided research services.
As of October 31, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in any distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The funds do not pay
"interest" or guarantee any fixed rate of return on an investment in their
shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of interest on their investments. This income, less expenses incurred in
the operation of a fund, constitutes a fund's net investment income from which
dividends may be paid to you. Any distributions by a 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 funds may derive capital gains and losses in
connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on a fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by a fund. These gains when
distributed will be taxable to you as ordinary dividends, and any losses will
reduce a fund's ordinary income otherwise available for distribution to you.
This treatment could increase or decrease a fund's ordinary income distributions
to you, and may cause some or all of a fund's previously distributed income to
be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of the Global Fund's total assets at the
end of the fiscal year are invested in securities of foreign corporations, the
Global Fund may elect to pass-through to you your pro rata share of foreign
taxes paid by it. If this election is made, the year-end statement you receive
from the Global Fund will show more taxable income than was actually distributed
to you. However, you will be entitled to either deduct your share of such taxes
in computing your taxable income or (subject to limitations) claim a foreign tax
credit for such taxes against your U.S. federal income tax. The Global Fund will
provide you with the information necessary to complete your individual income
tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
Any loss incurred on the redemption or exchange of shares held for six months or
less will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares. All or a portion
of any loss that you realize upon the redemption of your fund shares will be
disallowed to the extent that you buy other shares in such fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to your
tax basis in the new shares you buy.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that must be met
by a fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from interest rather than dividends, generally none of its
distributions will be eligible for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund (possibly causing a fund to sell securities to raise the cash for
necessary distributions) and/or defer a fund's ability to recognize losses, and,
in limited cases, subject the Global Fund to U.S. federal income tax on income
from certain foreign securities. In turn, these rules may affect the amount,
timing or character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
The Global Fund is a nondiversified series, and the Short-Intermediate Fund is a
diversified series of Franklin Investors Securities Trust, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Massachusetts business trust on December 22, 1986, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the funds. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of a
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that a 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 each 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 a fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The Global Fund currently offers three classes of shares, Class A, Class C and
Advisor Class. The Short-Intermediate Fund currently offers two classes of
shares, Class A and Advisor Class. Each fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Global Government Income Fund - Class A
o Franklin Global Government Income Fund - Class C
o Franklin Global Government Income Fund - Advisor Class
o Franklin Short-Intermediate U.S. Government Securities Fund - Class A
o Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect a fund as a whole, each class has the same voting and other
rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.
As of February 1, 2000, the principal shareholders of the funds, beneficial or
of record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- --------------------------------------------------------------------------------
GLOBAL FUND
Franklin Templeton Trust Company1
for the IRA of
Frank J. Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 26.65
Franklin Templeton Trust Company1
for the IRA of
Margo Mynderse Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 26.65
Franklin Templeton Trust Company1
for the IRA of
Margo Mynderse Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 25.77
Franklin Templeton Trust Company1
for the IRA of
Margo Mynderse Isola
11555 Arroyo Oaks Drive
Los Altos Hills, CA 94024-6527 Advisor 10.37
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
- --------------------------------------------------------------------------------
GLOBAL FUND (CONT.)
Franklin Templeton Trust Company1
for the IRA of
Deborah Gatzek Kratter
1600 Marlborough Rd.
Hillsborough, CA 94010-7114 Advisor 9.11
SHORT-INTERMEDIATE FUND
Franklin Templeton Trust Company1
FBO Harris J. Ashton IRA
P. O. Box 5086
San Mateo, CA 94402-0086 Advisor 57.32
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As of February 1, 2000, the officers and board members, as a group, owned of
record and beneficially 10.5% of the Global Fund - Advisor Class, 58.02% of the
Short-Intermediate Fund - Advisor Class and less than 1% of the outstanding
shares of the other classes. The board members may own shares in other funds in
the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------
Each fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with a fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a 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. We may deduct any applicable banking charges
imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials
in publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to a fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
DEALER COMPENSATION Distributors and/or its affiliates may provide financial
support to 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
and/or total assets with the Franklin Templeton Group of Funds. The amount of
support may be affected by: total sales; net sales; levels of redemptions; the
proportion of a securities dealer's sales and marketing efforts in the Franklin
Templeton Group of Funds; a securities dealer's support of, and participation
in, Distributors' marketing programs; a securities dealer's compensation
programs for its registered representatives; and the extent of a securities
dealer's marketing programs relating to the Franklin Templeton Group of Funds.
Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE For the Global Fund, if you request the exchange of the total
value of your account, declared but unpaid income dividends and capital gain
distributions will be reinvested in the fund and exchanged into the new fund at
net asset value when paid. For the Short-Intermediate Fund, if you request the
exchange of the total value of your account, accrued but unpaid income dividends
and capital gain distributions will be reinvested in the fund at net asset value
on the date of the exchange, and then the entire share balance will be exchanged
into the new fund. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a 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
each fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from a fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. Each fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The funds do not intend to redeem illiquid
securities in kind. If this happens, however, you may not be able to recover
your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to a 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 a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither a fund nor its agents shall
be liable to you or any other person if, for any reason, a redemption request by
wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with a 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 also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to a fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
- --------------------------------------------------------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the funds value those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The funds value over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the funds
value them according to the broadest and most representative market as
determined by the manager.
The Global Fund values portfolio securities underlying actively traded call
options at their market price as determined above. The current market value of
any option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last sale
price is outside the bid and ask prices, the fund values options within the
range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
For the Global Fund, trading in securities on European and Far Eastern
securities exchanges and over-the-counter markets is normally completed well
before the close of business of the NYSE on each day that the NYSE is open.
Trading in European or Far Eastern securities generally, or in a particular
country or countries, may not take place on every NYSE business day.
Furthermore, trading takes place in various foreign markets on days that are not
business days for the NYSE and on which the fund's NAV is not calculated. Thus,
the calculation of the fund's NAV does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
funds may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- --------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each 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 funds for acting as
underwriter of the funds' Advisor Class shares.
PERFORMANCE
- --------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a 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 funds are
based on the standardized methods of computing performance mandated by the SEC.
For periods before January 1, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the relevant
time period, excluding the effect of Class A's maximum initial sales charge, and
including the effect of the distribution and service (Rule 12b-1) fees
applicable to the fund's Class A shares. For periods after January 1, 1997,
Advisor Class standardized performance quotations are calculated as described
below.
An explanation of these and other methods used by the funds to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended October 31,
1999, were:
ADVISOR CLASS 1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- --------------------------------------------------------------------------------
Global Fund 1.03 7.09 6.86
Short-Intermediate Fund 1.62 5.75 6.37
The following SEC formula was used to calculate these figures:
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, the account was completely redeemed at the end of each period
and the deduction of all applicable charges and fees. Cumulative total return,
however, is based on the actual return for a specified period rather than on the
average return over the periods indicated above. The cumulative total returns
for the indicated periods ended October 31, 1999, were:
ADVISOR CLASS 1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- --------------------------------------------------------------------------------
Global Fund 1.02 41.83 97.14
Short-Intermediate Fund 1.62 32.24 85.49
CURRENT YIELD Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the net asset value per share on the last day of the
period and annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders of the class during the base period. The yields
for the 30-day period ended October 31, 1999, were:
ADVISOR CLASS YIELD (%)
- --------------------------------------------------------------------------------
Global Fund 6.82
Short-Intermediate Fund 5.40
The following SEC formula was used to calculate these figures:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the net asset value per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current net asset value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rates for the 30-day period ended October 31, 1999, were:
DISTRIBUTION
ADVISOR CLASS RATE (%)
- --------------------------------------------------------------------------------
Global Fund 4.84
Short-Intermediate Fund 5.26
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of a fund as
a potential investment for IRAs, business retirement plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in a fund may satisfy
your investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials also may compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines provide
performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Lehman Brothers Aggregate Bond Index or its component indices measures yield,
price and total return for Treasury, agency, corporate, mortgage and Yankee
bonds.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers(R) and Bloomberg(R) L.P.
o Other taxable investments including CDs, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, and
repurchase agreements.
o Yields of other countries' government and corporate bonds as compared to U.S.
government and corporate bonds to illustrate the potentially higher returns
available outside the United States.
o IBC's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.
o Salomon Brothers World Government Bond Index, or its component indices. The
World Government Bond Index covers the available market for domestic
government bonds worldwide. It includes all fixed-rate bonds with a remaining
maturity of one year or longer with amounts outstanding of at least the
equivalent of $25 million dollars. The index provides an accurate, replicable
fixed-income benchmark for market performance.
Returns are in local currency.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
From time to time, advertisements or information for a 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 also may compare a fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in a CD issued by
a bank. For example, as the general level of interest rates rise, the value of a
fund's fixed-income investments, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to fall.
Conversely, when interest rates decrease, the value of a fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a fund is not insured by any federal, state or
private entity.
In assessing 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 funds' 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 a fund will continue its performance as compared
to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The funds 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 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 a fund
cannot guarantee that these goals will be met.
Each fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $235 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 U.S. based open-end investment companies to the public. Each
fund may identify itself by its Nasdaq symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the funds are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may 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.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. 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 for both short-term debt and
commercial paper, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN INVESTORS
SECURITIES TRUST
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN BOND FUND - CLASS A
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2000
[INSERT FRANKLIN TEMPLETON BEN HEAD]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated March 1, 2000, which we may amend from time to time, contains
the basic information you should know before investing in a fund. You should
read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies 2
Risks 15
Officers and Trustees 20
Management and Other Services 23
Portfolio Transactions 25
Distributions and Taxes 26
Organization, Voting Rights
and Principal Holders 27
Buying and Selling Shares 29
Pricing Shares 35
The Underwriter 35
Performance 36
Miscellaneous Information 39
Description of Ratings 40
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
GOALS AND STRATEGIES
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND The fund's investment goal
is to seek a high level of current income, while providing lower volatility of
principal than a fund that invests in fixed-rate securities. The investment
objective of the fund is fundamental, which means that it may not be changed
without shareholder approval.
The fund seeks to achieve its investment goal 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 fund will only invest in mortgage securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
The fund may also invest up to 35% of its total assets in (a) fixed-rate notes,
bonds, and discount notes of the Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Federal Home
Loan Mortgage Corporation, 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 and by obligations guaranteed by
U.S. governmental agencies; and (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, although in time deposits will not exceed
10% of its total assets.
FRANKLIN BOND FUND The fund's principal investment goal is to provide high
current income, consistent with preservation of capital. Its secondary goal is
capital appreciation over the long term. These goals are fundamental, which
means they may not be changed without shareholder approval.
The fund tries to achieve its investment goals by investing at least 65% of its
total assets in investment grade debt securities, including government and
corporate debt securities and mortgage-backed and asset-backed securities. Up to
35% of the fund's total assets may be invested in non-investment grade debt
securities.
The following describes the various types of securities the funds may buy. Any
references to investments by the "funds" is intended to mean investments by both
Adjustable U.S. Government Fund and Bond Fund.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances. A
debt security typically has a fixed payment schedule which obligates the issuer
to pay interest to the lender and to return the lender's money over a certain
time period. A company typically meets its payment obligations associated with
its outstanding debt securities before it declares and pays any dividend to
holders of its equity securities. Bonds, notes, debentures and commercial paper
differ in the length of the issuer's payment schedule, with bonds carrying the
longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
U.S. GOVERNMENT SECURITIES The funds may invest without limit in obligations of
the U.S. government or of corporations chartered by Congress as federal
government instrumentalities. The funds 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 funds 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. Bond Fund may also invest in securities
issued or guaranteed by foreign governments and their agencies.
Several of the Franklin Templeton Funds, including the Adjustable U.S.
Government Fund, are major buyers of government securities. The manager will
seek to negotiate attractive prices for government securities and pass on any
savings from these negotiations to shareholders in the form of higher current
yields.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS Mortgage securities represent an
ownership interest in mortgage loans made by banks and other financial
institutions to finance purchases of homes, commercial buildings or other real
estate. These mortgage loans may have either fixed or adjustable interest rates.
The individual mortgage loans are packaged or "pooled" together for sale to
investors. As the underlying mortgage loans are paid off, investors receive
principal and interest payments.
The funds may invest in mortgage-backed securities issued or guaranteed by GNMA,
the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC). Bond Fund may invest in mortgage-backed securities
issued or guaranteed by private institutions. Bond Fund may also invest in
mortgage-backed securities issued or guaranteed by foreign governments or
governmental agencies.
A mortgage-backed security is an interest in a pool of mortgage loans. The
primary issuers or guarantors of these securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage-backed securities from pools of government guaranteed or
insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks and savings and loan
associations. FNMA and FHLMC issue mortgage securities from pools of
conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including savings and loan associations, savings
banks, commercial banks, credit unions and mortgage bankers. The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. Mortgage securities from FNMA and FHLMC are
not backed by the full faith and credit of the U.S. government. FNMA guarantees
full and timely payment of all interest and principal, and FHLMC guarantees
timely payment of interest and the ultimate collection of principal. Securities
issued by FNMA are supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. Securities issued by FHLMC are supported
only by the credit of the agency. There is no guarantee that the government
would support government agency securities and, accordingly, they may involve a
risk of non-payment of principal and interest. Nonetheless, because FNMA and
FHLMC are instrumentalities of the U.S. government, these securities are
generally considered to be high quality investments having minimal credit risks.
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.
Bond Fund 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 Bond
Fund's quality standards. Bond Fund may buy mortgage securities without
insurance or guarantees if, through an examination of the loan experience and
practices of the poolers, the manager determines that the securities meet the
fund's quality standards.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly payments consisting of a pro rata share of
both regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool (less GNMA's, FHLMC's or FNMA's
fees and any applicable loan servicing fees). Bond Fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage-backed securities nor do they extend to the value
of the funds' shares. In general, the value of debt securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas coupon rates
of adjustable rate mortgage securities move with market interest rates, and thus
their value tends to fluctuate to a lesser degree. In view of these factors, the
ability of the funds to obtain a high level of total return may be limited under
varying market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS (REMICS) AND MULTI-CLASS PASS-THROUGHS Bond Fund may invest in certain
debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities. These obligations may be issued or guaranteed by U.S.
government agencies or issued by certain financial institutions and other
mortgage lenders. The Adjustable U.S. Government Fund may only invest in CMOs or
REMICS issued and guaranteed by U.S. government agencies or instrumentalities.
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 FHLMC, FNMA or GNMA, (b) pools of mortgages that are
guaranteed by an agency or instrumentality of the U.S. government, or (c) pools
of mortgages that are not guaranteed by an agency or instrumentality of the U.S.
government and that may or may not be guaranteed by the private issuer.
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 to predict more
accurately the pace at which principal is returned. The funds 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 Adjustable U.S. Government Fund. 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.
Timely payment of interest and principal (but not the market value and yield) of
some of these pools is supported by various forms of insurance or guarantees
issued by private issuers, those who pool the mortgage assets and, in some
cases, by U.S. government agencies. Prepayments of the mortgages underlying a
CMO, which usually increase when interest rates decrease, will generally reduce
the life of the mortgage pool, thus impacting the CMO's yield. Under these
circumstances, the reinvestment of prepayments will generally be at a rate lower
than the rate applicable to the original CMO.
Some of the CMOs in which the funds may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs could
result in the inability to dispose of such securities at an advantageous price
under certain circumstances.
To the extent any privately issued CMOs in which the funds invest are considered
by the U.S. Securities and Exchange Commission (SEC) to be an investment
company, the funds will limit their investments in such securities in a manner
consistent with the provisions of the Investment Company Act of 1940 (1940 Act).
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 trust
believe that the risk of loss from an investment in privately issued CMOs is
justified by the higher yield the Bond Fund will earn in light of the historic
loss experience on these instruments.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the mortgages that collateralize
the REMICs in which the fund may invest include mortgages backed by GNMAs or
other mortgage pass-throughs issued or guaranteed by the U.S. government, its
agencies or instrumentalities or issued by private entities, which are not
guaranteed by any government agency or instrumentality.
ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS) ARMS, like traditional mortgage
securities, are interests in pools of mortgage loans and are issued or
guaranteed by a federal agency or by private issuers. The interest rates on the
mortgages underlying ARMS are reset periodically. The adjustable interest rate
feature of the mortgages underlying these mortgage securities generally will act
as a buffer to reduce sharp changes in the ARMS' 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 funds' net asset value should fluctuate less
significantly than if they invested in more traditional long-term, fixed-rate
securities. During periods of extreme fluctuation in interest rates, however,
the value of the ARMS will fluctuate affecting the funds' net asset value.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, the funds 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 funds, 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 funds 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 funds 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 before the interest rates on the underlying mortgages reset to market
rates. Also, a fund'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
funds 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 funds. 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 funds 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. There are several categories of indices,
including those based on U.S. Treasury securities, those derived from a
calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. The amount of interest due to an 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. The interest
rates paid on the ARMs in which the funds may invest are generally readjusted at
intervals of one year or less, although instruments with longer resets such as
three, five, seven and ten years are also permissible investments.
The underlying mortgages that collateralize the ARMs in which the funds may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMs in a fund's portfolio
will generally have annual reset limits or caps of 100 to 200 basis points,
fluctuations in interest rates above these levels could cause the mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
securities.
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 funds may
invest in them if they are consistent with the fund's goals, policies and
quality standards.
RESETS The interest rates paid on ARMS 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 fund 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 Bond Fund may invest in stripped mortgage
securities, which are derivative multi-class mortgage securities. The stripped
mortgage-backed securities in which Bond Fund may invest will not be limited to
those issued or guaranteed by agencies or instrumentalities of the U.S.
government, although such securities are more liquid than privately issued
stripped mortgage-backed securities.
Stripped mortgage 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
fund. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the fund 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(R) or Moody's, respectively.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests and are purchased and
sold by institutional investors, such as the fund, through several investment
banking firms acting as brokers or dealers. Some of these securities may be
illiquid. The staff of the SEC has indicated that only government-issued IO or
PO securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board of trustees. The board of trustees may, in the future, adopt
procedures that would permit the fund to acquire, hold and treat as liquid
government-issued IO and PO securities. At the present time, however, all such
securities will be treated as illiquid and will, together with any other
illiquid investments, not exceed 15% of the fund's net assets. This position may
be changed in the future, without notice to shareholders, in response to the
staff's continued reassessment of this matter, as well as to changing market
conditions.
ASSET-BACKED SECURITIES Bond Fund 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 and other assets. 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 fund may invest. In general, asset-backed securities contain
shorter maturities than bonds or mortgage loans. The rate of principal payment
on asset-backed securities generally depends on the rate of principal payments
received on the underlying assets. The payment rate may be affected by various
economic and other factors. Therefore, the yield may be difficult to predict,
and actual yield to maturity may be more or less than the anticipated yield to
maturity.
The credit quality of most asset-backed securities depends primarily on the
credit quality of the underlying assets, how well the issuers of the securities
are insulated from the credit risk of the originator or affiliated entities, and
the amount of credit support provided to the securities. Asset-backed securities
entail certain risks not presented by mortgage-backed securities as they do not
have the benefit of the same type of security interests in the underlying
collateral. Credit card receivables are generally unsecured and a number of
state and federal consumer credit laws give debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the outstanding balance. In
the case of automobile receivables, there is a risk that the holders may not
have either a proper or first security interest in all of the obligations
backing such receivables due to the large number of vehicles involved in a
typical issuance and the technical requirements imposed under state laws.
Therefore, recoveries on repossessed collateral may not always be available to
support payments on securities backed by these receivables.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on the underlying assets to make payments, asset-backed securities
may contain elements of credit support. Credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses from the
default by an obligor on the underlying assets. Liquidity protection refers to
advances, generally provided by the entity administering the pool of assets, to
ensure that the receipt of payments due on the underlying pool is timely.
Protection against losses from the default by an obligor enhances the likelihood
of payments of the obligations on at least some of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction, or through a combination of these
approaches. The fund will not pay any additional fees for credit support,
although the existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior subordinated securities" (multiple class securities with one or
more classes that are subordinate to the other classes with respect to the
payment of principal and interest, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses), and "over-collateralization" (where the scheduled payments on,
or the principal amount of, the underlying assets exceeds that required to make
payments on the securities and pay any servicing or other fees). The degree of
credit support provided is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in the securities.
MORTGAGE DOLLAR ROLLS Bond Fund may enter into mortgage dollar rolls in which
the fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type, coupon
and maturity) securities on a specified future date. During the period between
the sale and repurchase, the fund forgoes principal and interest paid on the
mortgage-backed securities. The fund is compensated by the difference between
the current sale price and the lower price for the future purchase (often
referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The fund could suffer a loss if the contracting party fails
to perform the future transaction in that the fund may not be able to buy back
the mortgage-backed securities it initially sold. Bond Fund intends to enter
into mortgage dollar rolls only with government securities dealers recognized by
the Federal Reserve Board or with member banks of the Federal Reserve System.
STRUCTURED INVESTMENTS In addition to CMOs and stripped mortgage-backed
securities, Bond Fund may invest in other structured investments such as
collateralized loan obligations and collateralized bond obligations. These
securities typically are issued in one or more classes that are backed by or
represent an interest in certain underlying instruments with the cash flows on
the underlying instruments apportioned among the classes to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions. The fund may invest in structured
investments that are either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured investments typically have
higher yields and present greater risks than unsubordinated structured
investments. Although the fund's purchase of subordinated structured investments
would have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of the
limitations placed on the extent of the fund's assets that may be used for
borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the fund's investment in
these structured investments may be limited by the restrictions contained in the
1940 Act. Structured investments are often sold in private placement
transactions. To the extent such investments are illiquid, they will be subject
to the fund's restrictions on investments in illiquid securities.
DERIVATIVE SECURITIES
Some types of investments discussed in the prospectus and this SAI may be
considered "derivative securities." 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, funds may invest in CMOs,
REMICs, multi-class pass-throughs, stripped mortgage securities, other
asset-backed securities, structured notes and uncovered mortgage dollar rolls.
Some, all or the component parts of these instruments may be considered
derivatives. As discussed below and in the prospectus, Bond Fund may enter into
futures contracts, option transactions and foreign currency exchange
transactions which are also generally considered "derivative securities."
Derivative securities may be used 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 fund will
not necessarily use these instruments or investment strategies to the full
extent permitted unless the manager believes that doing so will help the fund
achieve its goals, and the fund will not use all instruments or strategies at
all times.
FUTURES CONTRACTS Bond Fund may enter into contracts for the purchase or sale
for future delivery of financial futures and foreign currency futures and
options on these contracts. Financial futures contracts are commodity contracts
that obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts markets" by the Commodity Futures
Trading Commission (CFTC) and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with different interest rates from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The termination of a contractual obligation is accomplished by
buying (or selling, as the case may be) on a commodities exchange an identical
futures contract calling for delivery in the same month. Such a transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, the fund will incur brokerage fees
when it buys or sells futures contracts.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
initial margin), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked to the market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund will be required to pay the futures commission merchant an
amount equal to such change in value. The fund may also cover its futures
position by holding a call option on the same futures contract permitting the
fund to purchase the instrument or currency at a price no higher than the price
established in the futures contract which it sold.
Generally, the purpose of the acquisition or sale of a futures contract is to
attempt to protect the fund from fluctuations in the price of portfolio
securities without actually buying or selling the underlying security, although
the fund may engage in futures and related options to earn additional income.
For example, if the fund owns long-term bonds, and interest rates were expected
to increase, the fund might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an equivalent
value of the long-term bonds owned by the fund. If interest rates did increase,
the value of the debt securities owned by the fund would decline, but the value
of the futures contracts to the fund would increase at approximately the same
rate, thereby keeping the net asset value of the fund from declining as much as
it otherwise would have. The fund could accomplish similar results by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
often more liquid than the cash (securities) market, the use of futures
contracts as an investment technique allows the fund to maintain a defensive
position without having to sell its portfolio securities. Similarly, if the fund
expects that a foreign currency in which its securities are denominated will
decline in value against the U.S. dollar, the fund may sell futures contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an increase
in the value of the fund's futures position.
Alternatively, when it expects that interest rates may decline, the fund may
purchase futures contracts in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of futures contracts should be similar to that of long-term bonds, the
fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the futures contracts could be liquidated and the fund could then buy
long-term bonds on the cash (securities) market. Similarly, if the fund intends
to acquire a security or other asset denominated in a currency that is expected
to appreciate against the U.S. dollar, the fund may purchase futures contracts
on that currency. If the value of the foreign currency does appreciate, the
increase in the value of the futures position will offset the increased U.S.
dollar cost of acquiring the asset denominated in that currency.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus causing distortion. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the manager may still not
result in a successful transaction.
OPTIONS ON FUTURES CONTRACTS Bond Fund may buy and sell (write) options on
futures contracts. Depending on the pricing of the option compared to either the
price of the futures contract upon which it is based or the price of the
underlying debt securities or currency, it may or may not be less risky than
direct ownership of the futures contract of the underlying debt securities or
currency.
If the fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the fund will retain the
full amount of the option premium, which may provide a partial hedge against any
decline that may have occurred in the value of the fund's portfolio holdings. If
the futures price at expiration of the option is higher than the exercise price,
the fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities which the fund
intends to purchase. If a put or call option the fund has written is exercised,
the fund will incur a loss, which will be reduced by the amount of the premium
it received. The fund may lose the entire amount of the premium (plus related
transaction costs) paid for options it has purchased if the option expires
worthless. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the fund's losses from existing options on futures may to some extent be reduced
or increased by changes in the value of its portfolio securities.
The fund's ability to engage in the options on futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options on futures are relatively new and still developing, and it is
impossible to predict the amount of trading interest that may exist in various
types of options on futures. Therefore, no assurance can be given that the fund
will be able to utilize these instruments effectively for the purposes set forth
above. Furthermore, the fund's ability to engage in options on futures
transactions may be limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES Bond Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such reductions in the value of portfolio securities,
the fund may purchase put options on the foreign currency. If the value of the
currency does decline, the fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of the
securities, the fund may purchase call options on such currency. The purchase of
options could offset, at least partially, the effects of the adverse movements
in currency exchange rates. As with other types of options, however, the benefit
the fund derives from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the fund could sustain losses on transactions in foreign currency
options that would require the fund to forego a portion or all of the benefits
of advantageous changes in such rates.
The fund may also write options on foreign currencies for hedging purposes. For
example, where the fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to adverse fluctuations in currency exchange
rates the fund could, instead of purchasing a put option, write a call option on
the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the fund could write a
put option on the relevant currency. If currency exchange rates increase as
projected, the put option will expire unexercised and the premium received will
offset the increased cost. As with other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium received, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the fund
would be required to purchase or sell the underlying currency at a loss, which
may not be fully offset by the amount of the premium received. As a result of
writing options on foreign currencies, the fund may also be required to forego
all or a portion of the benefits that might otherwise have been obtained from
favorable changes in currency exchange rates.
All call options written on foreign currencies will be covered. A call option on
foreign currencies written by the fund is "covered" if the fund owns (or has an
absolute right to acquire) the underlying foreign currency covered by the call.
A call option is also covered if the fund has a call on the same foreign
currency in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the fund in cash and U.S. government securities
in a segregated account with its custodian.
The fund proposes to take advantage of investment opportunities in the area of
futures contracts and options on futures contracts that are not presently
contemplated for use by the fund or that are not currently available but which
may be developed in the future, to the extent such opportunities are both
consistent with the fund's investment goal and policies and are legally
permissible transactions for the fund. These opportunities, if they arise, may
involve risks that are different from those involved in the options and futures
activities described above.
FORWARD CURRENCY EXCHANGE CONTRACTS Bond Fund may enter into forward currency
exchange contracts (Forward Contract(s)) to attempt to minimize the risk to the
fund from adverse changes in the relationship between currencies. A Forward
Contract is an obligation to buy or sell a specific currency for an agreed price
at a future date which is individually negotiated and privately traded by
currency traders and their customers.
The fund may construct an investment position by combining a debt security
denominated in one currency with a Forward Contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
Forward Contract) that is intended to be similar in overall performance to a
debt security denominated in the same currency.
For example, an Italian lira-denominated position could be constructed by buying
a German mark-denominated debt security and simultaneously entering into a
Forward Contract to exchange an equal amount of marks for lira at a future date
and at a specified exchange rate. With such a transaction, the fund may be able
to receive a return that is substantially similar from a yield and currency
perspective to a direct investment in lira debt securities while achieving other
benefits from holding the underlying security. The fund may experience slightly
different results from its use of such combined investment positions as compared
to its purchase of a debt security denominated in the particular currency
subject to the Forward Contract. This difference may be enhanced or offset by
premiums that may be available in connection with the Forward Contract.
The fund may also enter into a Forward Contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
Forward Contract to sell an amount of that foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency; or when the fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
The fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable debt securities
equal to the amount of the purchase will be held in segregated accounts with the
fund's custodian bank to be used to pay for the commitment, or the fund will
cover any commitments under these contracts to sell currency by owning the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS The funds may buy U.S. government
obligations and other securities on a "when-issued" or "delayed-delivery" basis.
These transactions are arrangements under which the fund 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 a fund will generally buy securities on a
when-issued basis with the intention of acquiring the securities, it may sell
the securities before the settlement date if the fund deems it to be advisable.
When a fund 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 a fund engages in when-issued and delayed-delivery transactions, it
does so only for the purpose of acquiring portfolio securities consistent with
its investment goal and policies and not for the purpose of investment leverage.
In when-issued and delayed-delivery transactions, a fund relies on the seller to
complete the transaction. The seller's failure to do so may cause the fund to
miss a price or yield considered advantageous. Securities purchased on a
when-issued or delayed-delivery basis generally do not earn interest until their
scheduled delivery date. The funds are not subject to any percentage limit on
the amount of their assets that may be invested in when-issued purchase
obligations. Entering into a when issued or delayed delivery transaction is a
form of leverage that may affect changes in net asset value to a greater extent.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the funds'
portfolio in a temporary defensive manner. Under such circumstances, Bond Fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase agreements
and other money market equivalents, and the Adjustable U.S. Government Fund 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.
CASH AND CASH EQUIVALENTS The Adjustable U.S. Government Fund 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 Adjustable U.S. Government Fund
intends, however, to retain in cash only as much of its underlying assets as is
considered desirable or expedient under existing market conditions.
SHORT SELLING Bond Fund may engage in short selling. In a short sale, the fund
sells a security it does not own in anticipation of a decline in the market
value of that security. To complete the transaction, the fund must borrow the
security to make delivery to the buyer. The fund is then obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. Until the security is replaced, the fund must pay the lender any
dividends or interest that accrues during the period of the loan. To borrow the
security, the fund may also be required to pay a premium, which would increase
the cost of the security sold. The proceeds of the short sale will be retained
by the broker, to the extent necessary to meet margin requirements, until the
short position is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
fund replaces the borrowed security, and the fund will realize a gain if the
security declines in price between those same dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the fund is required to pay in connection with
the short sale.
The fund will place in a segregated account with its custodian bank an amount
equal to the difference between (a) the market value of the securities sold
short at the time they were sold short and (b) any cash or securities required
to be deposited as collateral with the broker in connection with the short sale
(not including the proceeds from the short sale). The segregated account will be
marked-to-market daily and at no time will the amount deposited in the
segregated account and with the broker as collateral be less than the then
current market value of the securities sold short. Under amendments made by the
Revenue Act of 1997, entering into a short sale could cause immediate
recognition of gain (but not loss) on the date the constructive sale of an
appreciated financial position is entered.
REPURCHASE AGREEMENTS The funds generally will have a portion of their assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, each fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian, securities with an initial market value of at least 102% of the
dollar amount invested by the fund in each repurchase agreement. The manager
will monitor the value of such securities daily to determine that the value
equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The funds will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 10% of the value of the Adjustable U.S. Government Fund's
total assets and 331/3% of the value of the Bond Fund's total assets, measured
at the time of the most recent loan. For each loan, the borrower must maintain
with the fund's custodian collateral (consisting of any combination of cash,
securities issued by the U.S. government and its agencies and instrumentalities,
or irrevocable letters of credit) with a value at least equal to the current
market value of the loaned securities. The funds retain all or a portion of the
interest received on investment of the cash collateral or receive a fee from the
borrower. The funds also continue to receive any distributions paid on the
loaned securities. The funds may terminate a loan at any time and obtain the
return of the securities loaned within the normal settlement period for the
security involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. Each fund will loan its securities only
to parties who meet creditworthiness standards approved by the fund's board of
trustees, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
BORROWING Bond Fund does not borrow money, except that the fund may borrow for
temporary or emergency purposes in an amount not to exceed 30% of its total
assets (including the amount borrowed).
Adjustable U.S. Government Fund may not borrow money or mortgage or pledge any
of the fund's 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.
As a matter of non-fundamental policy, the funds do not consider the purchase
and/or sale of a mortgage dollar roll to be a borrowing.
ILLIQUID INVESTMENTS The Adjustable U.S. Government Fund's policy is not to
invest more than 10% of its net assets in illiquid securities. Bond Fund may
invest up to 15% of its net assets in illiquid securities. Illiquid securities
are securities that cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the fund has valued the
securities and include, among other things, repurchase agreements of more than
seven days duration and other securities which are not readily marketable. For
Bond Fund, investments in savings deposits are generally considered illiquid and
will, together with other illiquid investments, not exceed 15% of the fund's
total net assets. Notwithstanding this limitation, Bond Fund may invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933, as amended (1933 Act) (restricted
securities), where such investment is consistent with the fund's investment
goals and the manager determines that there is a liquid institutional or other
market for such securities. For example, restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the 1933 Act and for which a liquid institutional market has developed
will be considered liquid even though such securities have not been registered
pursuant to the 1933 Act.
The board of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the board of trustees
will take into account the following factors: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). To the extent the fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.
MASTER/FEEDER STRUCTURE Adjustable U.S. Government Fund seeks to achieve its
investment goal by investing all of its assets in shares of the U.S. Government
Adjustable Rate Mortgage Portfolio (Portfolio). The Portfolio has the same
investment goal and substantially similar investment policies as the fund,
except, in all cases, the fund may pursue its policies by investing in a mutual
fund with the same investment goal and substantially similar policies and
restrictions as the fund. The investment goal of the Portfolio also is
fundamental and may not be changed without shareholder approval.
The fund's structure, where it invests all of its assets in the Portfolio, is
sometimes known as a "master/feeder" structure. By investing all of its assets
in shares of the Portfolio, the fund, other mutual funds and institutional
investors can pool their assets. This may result in asset growth and lower
expenses, although there is no guarantee this will happen.
If the fund, as a shareholder of the Portfolio, has to vote on a matter relating
to the Portfolio, it will hold a meeting of fund shareholders and will cast its
votes in the same proportion as the fund's shareholders voted.
The Portfolio is a diversified series of Adjustable Rate Securities Portfolios,
an open-end management investment company. Adjustable Rate Securities Portfolios
was organized as a Delaware business trust on February 15, 1991, and is
registered with the SEC. Adjustable Rate Securities Portfolios currently only
issues shares of the Portfolio. 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
"Management and Other Services."
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the 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.
Adjustable 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 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 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, except that all
or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and policies
of the fund.
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, except that all or substantially all of the assets of the
fund may be invested in another registered investment company having the same
investment objective and policies of the 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 the fund may be invested in
another registered investment company having the same investment objective and
policies of the fund. To the extent permitted by exemptions granted under the
Investment Company Act of 1940 (1940 Act), the fund 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 the fund may be invested in another
registered investment company having the same investment objective and policies
of the 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 the fund may be invested in another registered investment
company having the same investment objective and policies of the 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 the fund may be invested in another
registered investment company having the same investment objective and policies
as the fund or except to the extent the funds invest its uninvested daily cash
balances in shares of the Franklin Money Fund and other money market fund 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 fund 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 fund to invest all of its assets in the shares of the
Portfolio.
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 this SAI.
3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act. To the extent permitted by exemptions which may be
granted under the 1940 Act, the Portfolio may invest in shares of one or more
money market funds managed by Advisers or its affiliates. (The fund's investment
restriction in this respect is stated in far more detail.)
Adjustable U.S. Government Fund may also be subject to investment limitations
imposed by foreign jurisdictions in which the fund sells its shares.
Bond Fund may not:
1. Borrow money, except that the fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
30% of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
objectives and policies, and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest. Except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, mortgages or
pledges, or (b) entering into options, futures contracts, forward contracts or
repurchase transactions.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities).
7. Purchase the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities), if immediately after such investment
(a) more than 5% of the value of the fund's total assets would be invested in
such issuer or (b) more than 10% of the outstanding voting securities of such
issuer would be owned by the fund, except that up to 25% of the value of such
fund's total assets may be invested without regard to such 5% and 10%
limitations.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
funds intend to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when a fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
RISKS
There is no assurance that the funds will meet their investment goals.
Investments in securities that have potential to increase in value may be
subject to a greater degree of risk and may be more volatile than other types of
investments.
The value of your shares will increase as the value of the securities owned by
your fund increases and will decrease as the value of the fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the fund. In addition to the factors that affect the value
of any particular security that the fund owns, the value of fund shares may also
change with movements in the stock market as a whole.
ADJUSTABLE U.S. GOVERNMENT FUND:
INTEREST RATE Changes in interest rates will affect the value of the fund's
portfolio and its 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 fund's shares. Interest rates have increased and decreased in
the past. These changes are unpredictable. To the extent the fund invests in
fixed-rate securities, the value of the fund's shares will be more sensitive to
interest rate changes than if the fund were fully invested in adjustable-rate
securities.
MORTGAGE SECURITIES The mortgage securities in which the fund 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 fund) 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 fund 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.
MASTER/FEEDER STRUCTURE There are some risks associated with Adjustable U.S.
Government Fund's master/feeder structure. If other shareholders in the
Portfolio sell their shares, the fund's expenses may increase. Additionally, any
economies of scale the fund has achieved as a result of the structure may be
diminished. Institutional investors in the Portfolio that have a greater pro
rata ownership interest in the Portfolio than the fund could also have effective
voting control.
If the Portfolio changes its investment goal or any of its fundamental policies
and fund shareholders do not approve the same change for the fund, the fund may
need to withdraw its investment from the Portfolio. Likewise, if the board of
trustees considers it to be in the fund's best interest, it may withdraw the
fund's investment from the Portfolio at any time. If either situation occurs,
the board will decide what action to take. Possible solutions might include
investing all of the fund's assets in another pooled investment entity with the
same investment goal and policies as the fund, or hiring an investment manager
to manage the fund's investments. Either circumstance could increase the fund's
expenses.
BOND FUND:
INTEREST RATE Because the fund invests primarily in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
MORTGAGE SECURITIES The fund's investment in mortgage-backed securities differs
from conventional debt securities because principal is paid back over the life
of the security rather than at maturity. The fund may receive unscheduled
prepayments of principal due to voluntary prepayments, refinancing or
foreclosure on the underlying mortgage loans. During periods of declining
interest rates, the volume of principal prepayments generally increases as
borrowers refinance their mortgages at lower rates. The fund may be forced to
reinvest returned principal at lower interest rates, reducing the fund's income.
For this reason, mortgage-backed securities may be less effective than other
types of securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other investments with similar maturities. A reduction in the
anticipated rate of principal prepayments, especially during periods of rising
interest rates, may increase the effective maturity of mortgage-backed
securities, making them more susceptible than other debt securities to a decline
in market value when interest rates rise. This could increase the volatility of
the fund's returns and share price.
To the extent mortgage securities are purchased at a premium, unscheduled
principal prepayments, including prepayments resulting from mortgage
foreclosures, may result in some loss of the holder's principal investment to
the extent of the premium paid. On the other hand, if mortgage securities are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current and total returns and
will accelerate the recognition of income which, when distributed to you, will
be taxable as ordinary income.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Investments in depositary receipts also involve some or all of
the risks described below. You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition to
the usual risks inherent in domestic investments.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), restrictions on removal of assets, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than those
in the U.S. or other major economies. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. Foreign markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. Settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
The fund's investments in foreign securities may increase the risks with respect
to the liquidity of the fund's portfolio. This could inhibit the fund's ability
to meet a large number of shareholder redemption requests in the event of
economic or political turmoil in a country in which the fund has a substantial
portion of its assets invested or deterioration in relations between the U.S.
and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict the fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (viii) foreign taxation; (ix)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (x)
the absence of a capital market structure or market-oriented economy; and (xi)
the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
CURRENCY Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
HIGH YIELD SECURITIES Because the 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 fund invests.
Accordingly, an investment in the fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and objectives.
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 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 fund's net asset
value may be adversely affected before an issuer defaults. In addition, the fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund.
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 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 fund's portfolio.
The 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 fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The fund may 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 fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any other
person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth 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 fund's net asset value.
The fund relies on the manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the manager takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, the fund will not receive any cash until the cash payment date. If the
issuer defaults, the fund may not obtain any return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the cash payment date), and therefore
are generally issued and traded at a discount from their face amount or par
value. The discount varies depending on the time remaining until maturity or the
cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality.
DERIVATIVE SECURITIES:
FUTURES CONTRACTS Futures contracts entail risks. Although the fund believes
that use of such contracts will benefit the fund, if the manager's investment
judgment about pertinent market movements is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. Similarly, if the fund
sells a foreign currency futures contract and the U.S. dollar value of the
currency unexpectedly increases, the fund will lose the beneficial effect of the
increase on the value of the security denominated in that currency. In addition,
in such situations, if the fund has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements. These
sales may be, but will not necessarily be, at increased prices which reflect the
rising market. The fund may have to sell securities at a time when it may be
disadvantageous to do so.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in financial futures and related options also depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the fund's
portfolio. Inasmuch as these securities will not duplicate the components of any
index or underlying securities, the correlation will not be perfect.
Consequently, the fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Positions in financial futures and related options may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close a
futures or option position. The inability to close futures or options positions
could have an adverse impact on the fund's ability to effectively hedge its
securities. The fund will enter into a futures or option position only if there
appears to be a liquid secondary market for such futures or option.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The fund does not believe that these trading and positions limits
will have an adverse impact on the fund's futures strategies.
OPTIONS ON FUTURES The amount of risk the fund assumes when it purchases an
option on a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
ADDITIONAL RISKS OF FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES AND OPTIONS
ON FUTURES CONTRACTS Forward Contracts are not traded on contract markets
regulated by the CFTC or by the SEC. The ability of the fund to use Forward
Contracts could be restricted to the extent that Congress authorized the CFTC or
the SEC to regulate such transactions. Forward Contracts are traded through
financial institutions acting as market makers.
The fund may enter into forward currency exchange contracts in order to limit
the risk from adverse changes in the relationship between currencies. However,
these contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.
The purchase and sale of exchange-traded foreign currency options are subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, margins of options written, the nature of the
foreign currency market, possible intervention by governmental authorities, and
the effects of other political and economic events.
Futures contracts on currencies, options on futures contracts and options on
foreign currencies may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions could also be adversely
affected by (i) other foreign political and economic factors, (ii) less
available data than in the U.S. on which to base trading decisions, (iii) delays
in the fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the U.S., (iv) the imposition of exercise and
settlement terms and procedures, and margin requirements different from those in
the U.S., and (v) lesser trading volume.
ADJUSTABLE U.S. GOVERNMENT FUND AND BOND FUND:
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.
REPURCHASE AGREEMENT The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, the fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by the fund not within the
control of the fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the manager
acknowledges these risks, it is expected that if repurchase agreements are
otherwise deemed useful to the fund, these risks can be controlled through
careful monitoring procedures.
ADVANTAGES OF INVESTING IN ADJUSTABLE U.S. GOVERNMENT FUND Adjustable U.S.
Government Fund enables you to invest easily in mortgage securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities with a low
initial investment. 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 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 Adjustable U.S. Government
Fund's net investment income are declared and distributed monthly. Some change
in the net asset value per share of Adjustable U.S. Government Fund during the
month may be expected due to the accumulation of undistributed income and the
pay-out of such income once a month as a dividend. Please see "Pricing Shares"
later in this SAI. Principal payments received on the fund's mortgage securities
will be reinvested by the fund in other securities. These securities may have a
higher or lower yield than the mortgage securities already held by the fund,
depending on market conditions.
An investment in the fund also provides liquidity since you may redeem shares of
the fund at any time at the current net asset value. Please see "Buying and
Selling Shares."
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors Bond Fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
S. Joseph Fortunato (67)
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman
(1995-1997) and Trustee (1993-1997), National Child Research Center, Assistant
to the President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison-United States Treasury Department (1988-1989).
*Edward B. Jamieson (51)
777 Mariners Island Blvd., San Mateo, CA 94404
President and Trustee
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
Chairman of the Board and Trustee
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President and Trustee
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
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 51 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
Trustee
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Reclamation (redevelopment); director or trustee, as
the case may be, of 27 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee, as
the case may be, of 47 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chairman, White River Corporation (financial
services) (until 1998) and Hambrecht and Quist Group (investment banking) (until
1992), President, National Association of Securities Dealers, Inc.
(until 1987).
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton Services,
Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin
Investment Advisory Services, Inc. and 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 51 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President and Chief Financial Officer
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 51 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
Secretary
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Senior Vice
President and General Counsel, Franklin Resources, Inc., Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.,
Executive Vice President, Franklin Advisers, Inc., Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC, and Vice President,
Chief Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 51 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 33 of the investment companies in the Franklin
Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Vice President, Franklin Templeton Services, Inc.; and officer of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 51 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
THE FRANKLIN GROUP
TOTAL FEES TEMPLETON GROUP OF FUNDS
RECEIVED FROM THE OF FUNDS2 ($) ON WHICH
NAME TRUST1 ($) EACH SERVES3
- ------------------------------------------------------------------------------
Frank Abbott, III 10,209 156,060 27
Harris Ashton 11,227 363,165 47
S. Joseph Fortunato 10,459 363,238 49
Edith E. Holiday 12,900 237,265 24
Frank W.T. LaHaye 10,209 156,060 27
Gordon Macklin 11,227 363,165 47
- ------------------------------------------------------------------------------
1. For the fiscal year ended October 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
The board, with approval of all noninterested and interested board members, has
adopted written procedures designed to deal with potential conflicts of interest
that may arise from the fund and the Adjustable Rate Securities Portfolios
having substantially the same boards. These procedures call for an annual review
of the fund's relationship with the Portfolio. If a conflict exists, the boards
may take action, which may include the establishment of a new board. The board
has determined that there are no conflicts of interest at the present time.
MANAGEMENT AND OTHER SERVICES
MANAGER AND SERVICES PROVIDED The Portfolio's and Bond Fund's manager is
Franklin Advisers, Inc. The manager is also the administrator of Adjustable U.S.
Government Fund. The manager is a wholly owned subsidiary of Franklin Resources,
Inc. (Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the Portfolio and Bond Fund to buy, hold or sell. The
manager also selects the brokers who execute the Portfolio's and Bond Fund's
portfolio transactions. The manager provides periodic reports to the board,
which reviews and supervises the manager's investment activities. To protect the
Portfolio and Bond Fund, the manager and its officers, directors and employees
are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the Portfolio and the Bond Fund. Similarly,
with respect to the Portfolio and Bond Fund, the manager is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that the manager and access persons, as defined by applicable federal
securities laws, may buy or sell for its or their own account or for the
accounts of any other fund. The manager is not obligated to refrain from
investing in securities held by the Portfolio and Bond Fund or other funds it
manages.
The Portfolio and Bond Fund, their manager and principal underwriter have each
adopted a code of ethics, as required by federal securities laws. Under the code
of ethics, employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the Bond Fund, the Adjustable U.S. Government
Fund, the Portfolio, their manager and the funds' principal underwriter will be
governed by the code of ethics.
Bond Fund's sub-advisor is Templeton Investment Counsel, Inc., through its
Global Bond Managers division. The sub-advisor has an agreement with the manager
and provides the manager with investment management advice and assistance. The
sub-advisor's activities are subject to the board's review and control, as well
as the manager's instruction and supervision.
MANAGEMENT FEES The Portfolio pays the manager a fee equal to an annual rate of:
o 0.400% of the value of net assets up to and including $5 billion; and
o 0.350% of the value of net assets over $5 billion and not over $10 billion;
and
o 0.330% of the value of net assets over $10 billion and not over $15
billion; and
o 0.300% of the value of net assets in excess of $15 billion.
Bond Fund pays the manager a fee equal to an annual rate of:
o 0.425% of the value of net assets up to and including $500 million; and
o 0.325% of the value of net assets over $500 million and not over $1
billion; and
o 0.280% of the value of net assets over $1 billion and not over $1.5
billion; and
o 0.235% of the value of net assets over $1.5 billion and not over $6.5
billion; and
o 0.215% of the value of net assets over $6.5 billion and not over $11.5
billion; and
o 0.200% of the value of net assets over $11.5 billion and not over $16.5
billion; and
o 0.190% of the value of net assets over $16.5 billion and not over $19
billion; and
o 0.180% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.170% of the value of net assets in excess of $21.5 billion.
The fee is computed according to the terms of the management agreement. Each
class of the Bond Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the Portfolio and Bond Fund
paid the following management fees:
MANAGEMENT FEES PAID ($)
1999 1998 1997
- ---------------------------------------------------------------------------
Mortgage Portfolio1 1,150,240 758,425 830,598
Bond Fund2 0 0 N/A
1. For the fiscal years ended 1999, 1998 and 1997, management fees, before any
advance waiver, totaled $1,150,240, $1,272,933 and $1,487,256, respectively.
Under an agreement by the manager to waive its fees, the fund paid the
management fees shown.
2. For the fiscal year ended October 31, 1999, and for the period from August 3,
1998, (inception) through October 31, 1998, management fees, before any advance
waiver, totaled $142,878 and $24,877, respectively. Under an agreement by the
manager to waive its fees, the fund paid the management fees shown.
For Bond Fund, the manager pays the sub-advisor a fee equal to 25% of the
investment advisory fee paid to the manager by the fund. The manager pays this
fee from the management fees it receives from the fund. For the last two fiscal
years ended October 31, the manager paid the following sub-advisory fees:
SUB-ADVISORY FEES
PAID ($)1
- -------------------- ---------------------
1999 $0
1998 0
1. For the fiscal year ended October 31, 1999, and for the period from August 3,
1998 (inception) through October 31, 1998, sub-advisory fees, before any advance
waiver, totaled $2,540 and $293, respectively. Under an agreement by the
sub-advisor to waive its fees, the manager paid the sub-advisory fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with Bond Fund to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of Bond Fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
Franklin Advisers, Inc. has an agreement with the Adjustable U.S. Government
Fund to provide certain administrative services and facilities for the funds.
ADMINISTRATION FEES Bond Fund pays FT Services a monthly fee equal on an annual
basis to 0.20% of the average daily net assets of the fund.
During the last two fiscal years ended October 31, the fund paid FT Services the
following administration fees:
ADMINISTRATION FEES
PAID ($)1
- -------------------------- ---------------------
1999 0
1998 0
1. For the fiscal year ended October 31, 1999, and for the period from August 3,
1998, (inception) through October 31, 1998, administration fees, before any
advance waiver, totaled $67,330 and $11,707, respectively. Under an agreement by
FT Services to waive its fees, the fund paid the administration fees shown.
Under its administration agreement, Adjustable U.S. Government Fund pays the
manager an administration fee equal to an annual rate of:
o 0.10% of the fund's average daily net assets up to and including $5
billion;
o 0.09% of average daily net assets over $5 billion up to and including $10
billion;
o 0.08% of average daily net assets over $10 billion.
During the last three fiscal years ended October 31, the fund paid the manager
the following administration fees:
ADMINISTRATION
FEES PAID ($)
- ---------------------- -------------------------
1999 286,655
1998 313,856
1997 363,663
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The funds
also will 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 funds. The amount of reimbursements
for these services per benefit plan participant fund account per year will 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 custodian for Adjustable U.S. Government Fund and
holds the fund's shares of the Portfolio on its books. Bank of New York, Mutual
Funds Division, 90 Washington Street, New York, NY 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 and
Bond Fund.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the funds' independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
Adjustable U.S. Government Fund will not incur any brokerage or other costs in
connection with the purchase or redemption of shares of the Portfolio.
The manager selects brokers and dealers to execute Bond Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit Bond Fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
Since most purchases by the Portfolio are principal transactions at net prices,
the Portfolio incurs little or no brokerage costs. The Portfolio deals directly
with the selling or buying principal or market maker without incurring charges
for the services of a broker on its behalf, unless it is determined that a
better price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The Portfolio seeks to
obtain prompt execution of orders at the most favorable net price. Transactions
may be directed to dealers in return for research and statistical information,
as well as for special services provided by the dealers in the execution of
orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the manager to supplement its own research and analysis
activities and to receive the views and information of individuals and research
staffs of other securities firms. As long as it is lawful and appropriate to do
so, the manager and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the funds' 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, also may be
considered a factor in the selection of broker-dealers to execute the funds'
portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when Bond Fund or Portfolio tenders portfolio securities pursuant
to a tender-offer solicitation. To recapture brokerage for the benefit of the
fund and the Portfolio, any portfolio securities tendered by the fund or the
Portfolio will be tendered through Distributors if it is legally permissible to
do so. In turn, the next management fee payable to the manager will be reduced
by the amount of any fees received by Distributors in cash, less any costs and
expenses incurred in connection with the tender.
If purchases or sales of securities of the fund or the Portfolio and one or more
other investment companies or clients supervised by the manager are considered
at or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed equitable
to all by the manager, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this procedure
could have a detrimental effect on the price or volume of the security so far as
the fund or the Portfolio is concerned. In other cases it is possible that the
ability to participate in volume transactions may improve execution and reduce
transaction costs to the fund and the Portfolio.
During the fiscal years ended 1999, 1998 and 1997, the Portfolio did not pay any
brokerage commissions.
During the last two fiscal years ended October 31, Bond Fund paid the following
brokerage commissions:
BROKERAGE COMMISSIONS
($)
1999 3,964
19981 30,383
1. For the period from August 3, 1998 (inception) through October 31, 1998.
For the fiscal year ended October 31, 1999, the funds did not pay brokerage
commissions to brokers who provided research services.
As of October 31, 1999, Bond Fund owned securities issued by Prudential Bache
Securities valued in the aggregate at $667,000. Except as noted, Bond Fund did
not own any securities issued by its regular broker-dealers as of the end of the
fiscal year.
As of October 31, 1999, Adjustable Rate Securities Portfolio did not own
securities of its regular broker-dealers.
DISTRIBUTIONS AND TAXES
The funds calculate dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in any distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The funds do not pay
"interest" or guarantee any fixed rate of return on an investment in their
shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The Adjustable U.S. Government Fund earns
income and gains on its investment in the Portfolio. The Portfolio receives
income generally in the form of interest and other income on its investments.
This income, less expenses incurred in the operation of the Portfolio, is paid
to Adjustable U.S. Government Fund as ordinary dividend income. The ordinary
dividend income received from the Portfolio, less expenses incurred in the
operation of the Adjustable U.S. Government Fund, constitutes the Adjustable
U.S. Government Fund's net investment income from which dividends may be paid to
you. Any distributions by the Adjustable U.S. Government Fund from such income
will be taxable to you as ordinary income, whether you take them in cash or in
additional shares.
Bond Fund receives income generally in the form of interest on its investments.
This income, less expenses incurred in the operation of Bond Fund, constitutes
Bond Fund's net investment income from which dividends may be paid to you. Any
distributions by Bond Fund from such income will be taxable to you as ordinary
income, whether you receive them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The Portfolio may realize capital gains from
sales or dispositions of its securities. These capital gains are distributed to
the Adjustable U.S. Government Fund as capital gain distributions. The
Adjustable U.S. Government Fund may also derive capital gains and losses in
connection with sales or other dispositions of its Portfolio shares. Bond Fund
may derive capital gains in connection with sales or other dispositions of its
securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains, including
capital gain distributions received from the Portfolio, will be taxable to you
as long-term capital gain, regardless of how long you have held your shares in a
fund. Any net capital gains realized by a fund generally will be distributed
once each year, and may be distributed more frequently, if necessary, to reduce
or eliminate excise or income taxes on a fund.
EFFECT OF FOREIGN INVESTMENTS on distributions Bond Fund is authorized to invest
in foreign securities. Most foreign exchange gains realized on the sale of debt
securities are treated as ordinary income by the fund. Similarly, foreign
exchange losses realized by the fund on the sale of debt securities are
generally treated as ordinary losses by the fund. These gains when distributed
will be taxable to you as ordinary dividends, and any losses will reduce the
fund's ordinary income otherwise available for distribution to you. This
treatment could increase or decrease 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.
Bond Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. This, in turn, could reduce ordinary income
distributions to you.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
Any loss incurred on the redemption or exchange of shares held for six months or
less will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares. All or a portion
of any loss that you realize upon the redemption of your fund shares will be
disallowed to the extent that you buy other shares in such fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to your
tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report any gain or loss on the redemption of your original shares
in a fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in a fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that must be met
by a fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations. It is anticipated, however, that no portion of
the Adjustable U.S. Government Fund's distributions to you will qualify for
exemption from state and local personal income tax as dividends paid from
interest earned on direct obligations of the U.S. government. Even if the
Portfolio invests in direct obligations of the U.S. government, the Adjustable
U.S. Government Fund does so only indirectly by investing in the Portfolio's
shares.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because each fund's income is
directly or indirectly attributable primarily to interest rather than dividends,
generally none of their distributions will be eligible for the corporate
dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES Bond Fund and Portfolio may invest in complex
securities. These investments may be subject to numerous special and complex tax
rules. These rules could affect whether gains and losses recognized by Bond Fund
and Portfolio are treated as ordinary income or capital gain, accelerate the
recognition of income to Bond Fund and Portfolio (possibly causing Bond Fund and
Portfolio to sell securities to raise the cash for necessary distributions)
and/or defer Bond Fund's and Portfolio's ability to recognize losses and, in
limited cases, subject the Bond Fund to U.S. federal income tax on income from
certain foreign securities. In turn, these rules may affect the amount, timing
or character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
Each fund is a diversified series of Franklin Investors Securities Trust, an
open-end management investment company, commonly called a mutual fund. The trust
was organized as a Massachusetts business trust on December 22, 1986, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the fund. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of a
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that each 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 a fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
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 Adjustable U.S. Government Fund's sales
charge structure and Rule 12b-1 plan are similar to those of Class A shares,
shares of the fund are considered Class A shares for redemption, exchange and
other purposes.
Bond Fund offers two classes of shares, Class A and Advisor Class.
The fund may offer additional classes of shares in the future. The full title of
each class is:
o Franklin Bond Fund - Class A
o Franklin Bond Fund - Advisor Class
Shares of each class of Bond Fund represent proportionate interests in the
fund's assets. On matters that affect the fund as a whole, each class has the
same voting and other rights and preferences as any other class. On matters that
affect only one class, only shareholders of that class may vote. Each class
votes separately on matters affecting only that class, or expressly required to
be voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes and
series of the trust for matters that affect the trust as a whole. Additional
series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.
As of February 1, 2000, the principal shareholders of each fund, beneficial or
of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
BOND FUND
Franklin Templeton Fund
Allocator Conservative Target Fund
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470 Advisor 20.34
Franklin Templeton Fund
Allocator Moderate Target Fund
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470 Advisor 40.43
Franklin Templeton Fund
Allocator Growth Target Fund
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470 Advisor 19.93
Franklin Resources, Inc.
555 Airport Blvd., 4th Floor
Burlingame, CA 94010 Advisor 18.37
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and
trustees of the trust, may be considered beneficial holders of the fund shares
held by Franklin Resources, Inc. (Resources). As principal shareholders of
Resources, they may be able to control the voting of Resources' shares of the
fund.
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 Adjustable U.S. Government Fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of the fund.
As of February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class. The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
Each fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with a fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a 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.
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 are legal investments for you. If you are
a municipal investor considering the investment of proceeds from bond offerings,
you should consult with expert counsel to determine the effect, if any, of
various payments made by the fund, its manager or its principal underwriter on
arbitrage rebate calculations.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a 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. We may deduct any applicable banking charges
imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
For Adjustable U.S. Government Fund, if you buy shares through the reinvestment
of dividends, the shares will be purchased at the net asset value determined on
the business day following the dividend record date (sometimes known as the
"ex-dividend date"). The processing date for the reinvestment of dividends may
vary and does not affect the amount or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Bond Fund -
Class A and 2.25% for Adjustable U.S. Government Fund.
The initial sales charge may be reduced for certain large purchases, as
described in the prospectus. We offer several ways for you to combine your
purchases in the Franklin Templeton Funds to take advantage of the lower sales
charges for large purchases. The Franklin Templeton Funds include the U.S.
registered mutual funds in the Franklin Group of Funds(R) and the Templeton
Group of Funds except Franklin Templeton Variable Insurance Products Trust,
Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products Series
Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge, you
may combine the amount of your current purchase with the cost or current value,
whichever is higher, of your existing shares in the Franklin Templeton Funds.
You also may combine the shares of your spouse, children under the age of 21 or
grandchildren under the age of 21. If you are the sole owner of a company, you
also may add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT (LOI). You may buy shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
shares registered in your name until you fulfill your LOI. Your periodic
statements will include the reserved shares in the total shares you own, and
we will pay or reinvest dividend and capital gain distributions on the
reserved shares according to the distribution option you have chosen.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the LOI or pay the higher sales charge.
After you file your LOI with a fund, you may buy shares at the sales charge
applicable to the amount specified in your LOI. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only after
notification to Distributors that the investment qualifies for a discount. Any
purchases you made within 90 days before you filed your LOI also may qualify for
a retroactive reduction in the sales charge. If you file your LOI with a fund
before a change in the fund's sales charge, you may complete the LOI at the
lower of the new sales charge or the sales charge in effect when the LOI was
filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, or to any penalty as a result of the early termination
of a plan, nor are these plans entitled to receive retroactive adjustments in
price for investments made before executing the LOI.
Group purchases. If you are a member of a qualified group, you may buy 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 a fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased a fund's
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Fund shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund. The
distributions generally must be reinvested in the same share class. Certain
exceptions apply, however, to Class C shareholders of another Franklin
Templeton Fund who chose to reinvest their distributions in shares of a fund
before November 17, 1997, and to Advisor Class or Class Z shareholders of a
Franklin Templeton Fund who may reinvest their distributions in a fund.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid and
the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Fund shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in
a fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
the order.
o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined a fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in a fund is permissible and suitable for you and the effect, if
any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual Series
Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31, 1996,
or who sold his or her shares of Mutual Series Class Z within the past 365
days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy shares without an initial sales
charge. We may enter into a special arrangement with a securities dealer, based
on criteria established by the funds, to add together certain small qualified
retirement plan accounts for the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the funds' 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.
Bond Fund's Class A shares and Adjustable U.S. Government Fund's shares may be
offered to investors in Taiwan through securities advisory firms known locally
as Securities Investment Consulting Enterprises. In conformity with local
business practices in Taiwan, shares may be offered with the following schedule
of sales charges:
SALES SIZE OF PURCHASE - U.S. DOLLARS CHARGE (%)
- ----------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may be
deemed an underwriter under the Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the funds'
prospectus.
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.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for purchases
by certain retirement plans without an initial sales charge. These payments may
be made 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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin Templeton Group of Funds.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs, a CDSC may apply on any shares you sell within 12 months of purchase.
The CDSC is 1% of the value of the shares sold or the net asset value at the
time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy shares without an initial sales charge also may be subject to a
CDSC if the retirement plan is transferred out of the Franklin Templeton Funds
or terminated within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
CDSC WAIVERS. The CDSC generally will be waived for:
o Account fees
o Sales of shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the securities dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, or (iv) the securities dealer of record has entered into a
supplemental agreement with Distributors
o Redemptions by investors who purchased $1 million or more without an initial
sales charge if the securities dealer of record waived its commission in
connection with the purchase
o Redemptions by a fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995 (excluding Bond Fund)
o Redemptions through a systematic withdrawal plan (set up on or after February
1, 1995 in the case of Adjustable U.S. Government Fund), up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset value
depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from retirement
plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
EXCHANGE PRIVILEGE For Adjustable U.S. Government Fund, if you request the
exchange of the total value of your account, declared but unpaid income
dividends and capital gain distributions will be reinvested in the fund and
exchanged into the new fund at net asset value when paid. For Bond Fund, if you
request the exchange of the total value of your account, accrued but unpaid
income dividends and capital gain distributions will be reinvested in the fund
at net asset value on the date of the exchange, and then the entire share
balance will be exchanged into the new fund. Backup withholding and information
reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the Portfolio or Bond 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 Portfolio's and fund's general policy to initially invest this
money in short-term, interest-bearing money market instruments, unless it is
believed that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from the
short-term, interest-bearing money market instruments and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan also may be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from a fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. Each fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The funds do not intend to redeem illiquid
securities in kind. If this happens, however, you may not be able to recover
your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to a 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 a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither a fund nor its agents shall
be liable to you or any other person if, for any reason, a redemption request by
wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with a 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 also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to a fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
Each fund calculates the NAV per share each business day at the close of trading
on the New York Stock Exchange (normally 1:00 p.m. Pacific time). The funds do
not calculate the NAV on days the New York Stock Exchange (NYSE) is closed for
trading, which include New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
When determining its NAV, each fund and the Portfolio value cash and receivables
at their realizable amounts, and records interest as accrued and dividends on
the ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund and the Portfolio value those securities at the last quoted
sale price of the day or, if there is no reported sale, within the range of the
most recent quoted bid and ask prices. The fund and the Portfolio value
over-the-counter portfolio securities within the range of the most recent quoted
bid and ask prices. If portfolio securities trade both in the over-the-counter
market and on a stock exchange, the Portfolio and the funds value them according
to the broadest and most representative market as determined by the manager.
Bond Fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Bond Fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
funds may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended October 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- -----------------------------------------------------------------------------
1999
Adjustable U.S. 194,174 15,773 77,580
Government Fund
Bond Fund 65,352 4,701 -
1998
Adjustable U.S. 188,713 26,700 0
Government Fund
Bond Fund1 30,383 1,924 0
1997
Adjustable U.S. 160,892 22,069 0
Government Fund
Bond Fund N/A N/A N/A
1. For the period from August 3, 1998 (inception) through October 31, 1998.
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted plans pursuant to
Rule 12b-1 for the Bond Fund's Class A shares and for the Adjustable U.S.
Government Fund's shares. Each plan is designed to benefit the fund and its
shareholders. Each plan is expected to, among other things, increase advertising
of the fund, encourage sales of the fund and service to its shareholders, and
increase or maintain assets of the fund so that certain fixed expenses may be
spread over a broader asset base, resulting in lower per share expense ratios.
In addition, a positive cash flow into the fund is useful in managing the fund
because the manager has more flexibility in taking advantage of new investment
opportunities and handling shareholder redemptions.
Under each plan, the fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the fund or class.
These expenses also may include service fees paid to securities dealers or
others who have executed a servicing agreement with the fund, Distributors or
its affiliates who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for sales
purposes, and of preparing and distributing sales literature and advertisements;
and a prorated portion of Distributors' overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses."
The Bond Fund may pay up to 0.25% per year of Class A's average daily net
assets. The Adjustable U.S. Government Fund may pay up to 0.25% per year of the
fund's average daily net assets. The plan is a reimbursement plan. It allows the
fund to reimburse Distributors for eligible expenses that Distributors has shown
it has incurred. The fund will not reimburse more than the maximum amount
allowed under the plan. Any unreimbursed expenses of the Adjustable U.S.
Government Fund from one year may not be carried over to or reimbursed in later
years.
For the fiscal year ended October 31, 1999, the amounts paid by the fund
pursuant to the plan were:
ADJUSTABLE
U.S.
GOVERNMENT BOND
FUND ($) FUND ($)
- ------------------------------------------------------------------------
Advertising 19,231 8,482
Printing and mailing prospectuses 6,872 1,635
other than to current shareholders
Payments to underwriters 4,878 212
Payments to broker-dealers 670,700 5,413
Other 15,054 427
---------------------------
Total 716,735 16,169
In addition to the payments that Distributors or others are entitled to under
the plan, each plan also provides that to the extent the fund, the manager or
Distributors or other parties on behalf of the fund, the manager or Distributors
make payments that are deemed to be for the financing of any activity primarily
intended to result in the sale of fund shares within the context of Rule 12b-1
under the Investment Company Act of 1940, as amended, then such payments shall
be deemed to have been made pursuant to the plan.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plan because of applicable federal law prohibiting certain
banks from engaging in the distribution of mutual fund shares. These banks,
however, are allowed to receive fees under the plan for administrative servicing
or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plan and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plan should be continued.
The plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of the plan also are consistent with Rule 12b-1.
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 a 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 funds are
based on the standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the funds to
compute or express performance follows. Regardless of the method used, past
performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in a fund. The average
annual total returns for the indicated periods ended October 31, 1999, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- ----------------------------------------------------------------------------
Adjustable U.S.
Government Fund 1.85 5.47 5.08
Since Inception
1 Year (%) (8/3/98) (%)
- ----------------------------------------------------------------------------
Bond Fund -4.95 -0.85
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. Cumulative total
return, however, is based on the actual return for a specified period rather
than on the average return over the periods indicated above. The cumulative
total returns for the indicated periods ended October 31, 1999, were:
1 YEAR (%) 5 YEARS (%) 10 YEARS (%)
- -------------------------------------------------------------------------
Adjustable U.S.
Government Fund 1.85 30.53 64.13
SINCE INCEPTION
1 YEAR (%) (8/3/98) (%)
- ----------------------------------------------------------
Bond Fund -4.95 -1.06
CURRENT YIELD Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yields for the 30-day period ended October 31, 1999, were:
Adjustable U.S. Government Fund 4.50%
Bond Fund - Class A 6.87%
The following SEC formula was used to calculate these figures:
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 premium income from option writing for Bond Fund and
short-term capital gains, and is calculated over a different period of time. The
current distribution rates for the 30-day period ended October 31, 1999 were:
Adjustable U.S. Government Fund 4.54%
Bond Fund - Class A 6.22%
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a 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 funds also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of a fund as a potential investment for
IRAs, business retirement plans, and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which it is presumed
no federal income tax applies.
Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in a fund may satisfy
your investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials also may compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
Adjustable U.S. Government Fund:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY MAGAZINES - provide
performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers(R) and Bloomberg(R) L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
Bond Fund:
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40 bonds.
The index attempts to track the new-issue market as closely as possible, so
it changes bonds twice a month, adding all new bonds that meet certain
requirements and deleting an equivalent number according to their secondary
market trading activity. As a result, the average par call date, average
maturity date, and average coupon rate can and have changed over time. The
average maturity generally has been about 29-30 years.
o Financial publications: The Wall Street Journal, and Business Week, Financial
World, Forbes, Fortune, and Money magazines - provide performance statistics
over specified time periods.
o Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan(R) companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers(R) and Bloomberg(R) L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
From time to time, advertisements or information for a 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 also may compare a fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in a CD issued by
a bank. For example, as the general level of interest rates rise, the value of a
fund's fixed-income investments, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to fall.
Conversely, when interest rates decrease, the value of a fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a fund is not insured by any federal, state or
private entity.
In assessing 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 funds' 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 a fund will continue its performance as compared
to these other averages.
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 funds 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 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 a fund
cannot guarantee that these goals will be met.
Each fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $235 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 U.S. based open-end investment companies to the public. Each
fund may identify itself by its Nasdaq symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the funds are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN
BOND FUND
FRANKLIN INVESTORS SECURITIES TRUST
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
[INSERT FRANKLIN TEMPLETON BEN HEAD]
MARCH 1, 2000
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated March 1, 2000, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies ................................................... 2
Risks .................................................................. 12
Officers and Trustees .................................................. 17
Management and Other Services .......................................... 19
Portfolio Transactions ................................................. 21
Distributions and Taxes ................................................ 22
Organization, Voting Rights
and Principal Holders ................................................. 23
Buying and Selling Shares .............................................. 24
Pricing Shares ......................................................... 26
The Underwriter ........................................................ 27
Performance ............................................................ 27
Miscellaneous Information .............................................. 29
Description of Ratings ................................................. 30
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
GOALS AND STRATEGIES
The fund's principal investment goal is to provide high current income,
consistent with preservation of capital. Its secondary goal is capital
appreciation over the long term. These goals are fundamental, which means they
may not be changed without shareholder approval.
The fund tries to achieve its investment goals by investing at least 65% of its
total assets in investment grade debt securities, including government and
corporate debt securities and mortgage-backed and asset-backed securities. Up to
35% of the fund's total assets may be invested in non-investment grade debt
securities.
The following describes the various types of securities the fund may buy.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances. A
debt security typically has a fixed payment schedule which obligates the issuer
to pay interest to the lender and to return the lender's money over a certain
time period. A company typically meets its payment obligations associated with
its outstanding debt securities before it declares and pays any dividend to
holders of its equity securities. Bonds, notes, debentures and commercial paper
differ in the length of the issuer's payment schedule, with bonds carrying the
longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
U.S. GOVERNMENT SECURITIES The fund may invest without limit in obligations of
the U.S. government or of corporations chartered by Congress as federal
government instrumentalities. The fund 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 fund 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. The fund may also invest in securities
issued or guaranteed by foreign governments and their agencies.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS Mortgage securities represent an
ownership interest in mortgage loans made by banks and other financial
institutions to finance purchases of homes, commercial buildings or other real
estate. These mortgage loans may have either fixed or adjustable interest rates.
The individual mortgage loans are packaged or "pooled" together for sale to
investors. As the underlying mortgage loans are paid off, investors receive
principal and interest payments.
The fund may invest in mortgage-backed securities issued or guaranteed by GNMA,
the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC). The fund may invest in mortgage-backed securities
issued or guaranteed by private institutions. The fund may also invest in
mortgage-backed securities issued or guaranteed by foreign governments or
governmental agencies.
A mortgage-backed security is an interest in a pool of mortgage loans. The
primary issuers or guarantors of these securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage-backed securities from pools of government guaranteed or
insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks and savings and loan
associations. FNMA and FHLMC issue mortgage securities from pools of
conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including savings and loan associations, savings
banks, commercial banks, credit unions and mortgage bankers. The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. Mortgage securities from FNMA and FHLMC are
not backed by the full faith and credit of the U.S. government. FNMA guarantees
full and timely payment of all interest and principal, and FHLMC guarantees
timely payment of interest and the ultimate collection of principal. Securities
issued by FNMA are supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. Securities issued by FHLMC are supported
only by the credit of the agency. There is no guarantee that the government
would support government agency securities and, accordingly, they may involve a
risk of non-payment of principal and interest. Nonetheless, because FNMA and
FHLMC are instrumentalities of the U.S. government, these securities are
generally considered to be high quality investments having minimal credit risks.
The yields on these mortgage securities have historically exceeded the yields on
other types of U.S. government securities with comparable maturities due largely
to their prepayment risk.
The fund 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 fund's
quality standards. The fund may buy mortgage securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the manager determines that the securities meet the fund's quality
standards.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly payments consisting of a pro rata share of
both regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool (less GNMA's, FHLMC's or FNMA's
fees and any applicable loan servicing fees). The fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage-backed securities nor do they extend to the value
of the fund's shares. In general, the value of debt securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas coupon rates
of adjustable rate mortgage securities move with market interest rates, and thus
their value tends to fluctuate to a lesser degree. In view of these factors, the
ability of the fund to obtain a high level of total return may be limited under
varying market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS (REMICS) AND MULTI-CLASS PASS-THROUGHS The fund may invest in certain
debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities. These obligations may be issued or guaranteed by U.S.
government agencies or issued by certain financial institutions and other
mortgage lenders.
CMOs and REMICs 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 FHLMC, FNMA or GNMA, (b) pools of mortgages that are
guaranteed by an agency or instrumentality of the U.S. government, or (c) pools
of mortgages that are not guaranteed by an agency or instrumentality of the U.S.
government and that may or may not be guaranteed by the private issuer.
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 fund 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 to predict more
accurately the pace at which principal is returned. The fund 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). 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.
Timely payment of interest and principal (but not the market value and yield) of
some of these pools is supported by various forms of insurance or guarantees
issued by private issuers, those who pool the mortgage assets and, in some
cases, by U.S. government agencies. Prepayments of the mortgages underlying a
CMO, which usually increase when interest rates decrease, will generally reduce
the life of the mortgage pool, thus impacting the CMO's yield. Under these
circumstances, the reinvestment of prepayments will generally be at a rate lower
than the rate applicable to the original CMO.
Some of the CMOs in which the fund may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs could
result in the fund's inability to dispose of such securities at an advantageous
price under certain circumstances.
To the extent any privately issued CMOs in which the fund invests is considered
by the U.S. Securities and Exchange Commission (SEC) to be an investment
company, the fund will limit its investments in such securities in a manner
consistent with the provisions of the Investment Company Act of 1940 (1940 Act).
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 Bond Fund
believe that the risk of loss from an investment in privately issued CMOs is
justified by the higher yield the Bond Fund will earn in light of the historic
loss experience on these instruments.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the mortgages that collateralize
the REMICs in which the fund may invest include mortgages backed by GNMAs or
other mortgage pass-throughs issued or guaranteed by the U.S. government, its
agencies or instrumentalities or issued by private entities, which are not
guaranteed by any government agency or instrumentality.
ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS) ARMS, like traditional mortgage
securities, are interests in pools of mortgage loans and are issued or
guaranteed by a federal agency or by private issuers. The interest rates on the
mortgages underlying ARMS are reset periodically. The adjustable interest rate
feature of the mortgages underlying these mortgage securities generally will act
as a buffer to reduce sharp changes in the ARMS' 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 fund's (to the extent it invests in ARMS) net asset
value should fluctuate less significantly than if the fund invested in more
traditional long-term, fixed-rate securities. During periods of extreme
fluctuation in interest rates, however, the value of the ARMS will fluctuate
affecting the fund's net asset value.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, the fund 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 fund, 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 fund 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 fund 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 before the interest rates on the underlying mortgages reset to market
rates. Also, a fund'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
fund 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 fund. 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. There are several categories of indices,
including those based on U.S. Treasury securities, those derived from a
calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. The amount of interest due to an 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. The interest
rates paid on the ARMs in which the fund may invest are generally readjusted at
intervals of one year or less, although instruments with longer resets such as
three, five, seven and ten years are also permissible investments.
The underlying mortgages that collateralize the ARMs in which the fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMs in the fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause the
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
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 fund may
invest in them if they are consistent with the fund's goals, policies and
quality standards.
RESETS The interest rates paid on ARMS 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 fund 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 fund may invest in stripped mortgage
securities, which are derivative, multi-class mortgage securities. The stripped
mortgage-backed securities in which the fund may invest will not be limited to
those issued or guaranteed by agencies or instrumentalities of the U.S.
government, although such securities are more liquid than privately issued
stripped mortgage-backed securities.
Stripped mortgage 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
fund. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the fund 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(R) or Moody's, respectively.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests and are purchased and
sold by institutional investors, such as the fund, through several investment
banking firms acting as brokers or dealers. Some of these securities may be
illiquid. The staff of the SEC has indicated that only government-issued IO or
PO securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board of trustees. The board of trustees may, in the future, adopt
procedures that would permit the fund to acquire, hold and treat as liquid
government-issued IO and PO securities. At the present time, however, all such
securities will be treated as illiquid and will, together with any other
illiquid investments, not exceed 15% of the fund's net assets. This position may
be changed in the future, without notice to shareholders, in response to the
staff's continued reassessment of this matter, as well as to changing market
conditions.
ASSET-BACKED SECURITIES The fund 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 and other assets. 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 fund may invest. In general, asset-backed securities contain
shorter maturities than bonds or mortgage loans. The rate of principal payment
on asset-backed securities generally depends on the rate of principal payments
received on the underlying assets. The payment rate may be affected by various
economic and other factors. Therefore, the yield may be difficult to predict,
and actual yield to maturity may be more or less than the anticipated yield to
maturity.
The credit quality of most asset-backed securities depends primarily on the
credit quality of the underlying assets, how well the issuers of the securities
are insulated from the credit risk of the originator or affiliated entities, and
the amount of credit support provided to the securities. Asset-backed securities
entail certain risks not presented by mortgage-backed securities as they do not
have the benefit of the same type of security interests in the underlying
collateral. Credit card receivables are generally unsecured and a number of
state and federal consumer credit laws give debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the outstanding balance. In
the case of automobile receivables, there is a risk that the holders may not
have either a proper or first security interest in all of the obligations
backing such receivables due to the large number of vehicles involved in a
typical issuance and the technical requirements imposed under state laws.
Therefore, recoveries on repossessed collateral may not always be available to
support payments on securities backed by these receivables.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on the underlying assets to make payments, asset-backed securities
may contain elements of credit support. Credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses from the
default by an obligor on the underlying assets. Liquidity protection refers to
advances, generally provided by the entity administering the pool of assets, to
ensure that the receipt of payments due on the underlying pool is timely.
Protection against losses from the default by an obligor enhances the likelihood
of payments of the obligations on at least some of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction, or through a combination of these
approaches. The fund will not pay any additional fees for credit support,
although the existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior subordinated securities" (multiple class securities with one or
more classes that are subordinate to the other classes with respect to the
payment of principal and interest, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses), and "over-collateralization" (where the scheduled payments on,
or the principal amount of, the underlying assets exceeds that required to make
payments on the securities and pay any servicing or other fees). The degree of
credit support provided is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in the securities.
MORTGAGE DOLLAR ROLLS The fund may enter into mortgage dollar rolls in which the
fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type, coupon
and maturity) securities on a specified future date. During the period between
the sale and repurchase, the fund forgoes principal and interest paid on the
mortgage-backed securities. The fund is compensated by the difference between
the current sale price and the lower price for the future purchase (often
referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The fund could suffer a loss if the contracting party fails
to perform the future transaction in that the fund may not be able to buy back
the mortgage-backed securities it initially sold. The fund intends to enter into
mortgage dollar rolls only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.
STRUCTURED INVESTMENTS In addition to CMOs and stripped mortgage-backed
securities, the fund may invest in other structured investments such as
collateralized loan obligations and collateralized bond obligations. These
securities typically are issued in one or more classes that are backed by or
represent an interest in certain underlying instruments with the cash flows on
the underlying instruments apportioned among the classes to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions. The fund may invest in structured
investments that are either subordinated or unsubordinated to the right of
payment of another class. Subordinated structured investments typically have
higher yields and present greater risks than unsubordinated structured
investments. Although the fund's purchase of subordinated structured investments
would have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leverage for purposes of the
limitations placed on the extent of the fund's assets that may be used for
borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the fund's investment in
these structured investments may be limited by the restrictions contained in the
1940 Act. Structured investments are often sold in private placement
transactions. To the extent such investments are illiquid, they will be subject
to the fund's restrictions on investments in illiquid securities.
DERIVATIVE SECURITIES Some types of investments discussed in the prospectus and
this SAI may be considered "derivative securities." Derivatives are broadly
defined as financial instruments whose performance is derived, at least in part,
from the performance of an underlying asset. To the extent indicated, the fund
may invest in CMOs, REMICs, multi-class pass-throughs, stripped mortgage
securities, other asset-backed securities, structured notes and uncovered
mortgage dollar rolls. Some, all or the component parts of these instruments may
be considered derivatives. As discussed below and in the prospectus, the fund
may enter into futures contracts, option transactions and foreign currency
exchange transactions which are also generally considered "derivative
securities."
Derivative securities may be used 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 fund will
not necessarily use these instruments or investment strategies to the full
extent permitted unless the manager believes that doing so will help the fund
achieve its goals, and the fund will not use all instruments or strategies at
all times.
FUTURES CONTRACTS The fund may enter into contracts for the purchase or sale for
future delivery of financial futures and foreign currency futures and options on
these contracts. Financial futures contracts are commodity contracts that
obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of a futures contract means the acquisition of a contractual obligation to
deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts markets" by the Commodity Futures
Trading Commission (CFTC) and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract market.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with different interest rates from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The termination of a contractual obligation is accomplished by
buying (or selling, as the case may be) on a commodities exchange an identical
futures contract calling for delivery in the same month. Such a transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, the fund will incur brokerage fees
when it buys or sells futures contracts.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
initial margin), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked to the market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund will be required to pay the futures commission merchant an
amount equal to such change in value. The fund may also cover its futures
position by holding a call option on the same futures contract permitting the
fund to purchase the instrument or currency at a price no higher than the price
established in the futures contract which it sold.
Generally, the purpose of the acquisition or sale of a futures contract is to
attempt to protect the fund from fluctuations in the price of portfolio
securities without actually buying or selling the underlying security, although
the fund may engage in futures and related options to earn additional income.
For example, if the fund owns long-term bonds, and interest rates were expected
to increase, the fund might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an equivalent
value of the long-term bonds owned by the fund. If interest rates did increase,
the value of the debt securities owned by the fund would decline, but the value
of the futures contracts to the fund would increase at approximately the same
rate, thereby keeping the net asset value of the fund from declining as much as
it otherwise would have. The fund could accomplish similar results by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures market is
often more liquid than the cash (securities) market, the use of futures
contracts as an investment technique allows the fund to maintain a defensive
position without having to sell its portfolio securities. Similarly, if the fund
expects that a foreign currency in which its securities are denominated will
decline in value against the U.S. dollar, the fund may sell futures contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an increase
in the value of the fund's futures position.
Alternatively, when it expects that interest rates may decline, the fund may
purchase futures contracts in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of futures contracts should be similar to that of long-term bonds, the
fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the futures contracts could be liquidated and the fund could then buy
long-term bonds on the cash (securities) market. Similarly, if the fund intends
to acquire a security or other asset denominated in a currency that is expected
to appreciate against the U.S. dollar, the fund may purchase futures contracts
on that currency. If the value of the foreign currency does appreciate, the
increase in the value of the futures position will offset the increased U.S.
dollar cost of acquiring the asset denominated in that currency.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus causing distortion. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the manager may still not
result in a successful transaction.
OPTIONS ON FUTURES CONTRACTS The fund may buy and sell (write) options on
futures contracts. Depending on the pricing of the option compared to either the
price of the futures contract upon which it is based or the price of the
underlying debt securities or currency, it may or may not be less risky than
direct ownership of the futures contract of the underlying debt securities or
currency.
If the fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the fund will retain the
full amount of the option premium, which may provide a partial hedge against any
decline that may have occurred in the value of the fund's portfolio holdings. If
the futures price at expiration of the option is higher than the exercise price,
the fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities which the fund
intends to purchase. If a put or call option the fund has written is exercised,
the fund will incur a loss, which will be reduced by the amount of the premium
it received. The fund may lose the entire amount of the premium (plus related
transaction costs) paid for options it has purchased if the option expires
worthless. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the fund's losses from existing options on futures may to some extent be reduced
or increased by changes in the value of its portfolio securities.
The fund's ability to engage in the options on futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options on futures are relatively new and still developing, and it is
impossible to predict the amount of trading interest that may exist in various
types of options on futures. Therefore, no assurance can be given that the fund
will be able to utilize these instruments effectively for the purposes set forth
above. Furthermore, the fund's ability to engage in options on futures
transactions may be limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES The fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in which futures
contracts on foreign currencies, or forward contracts, will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such reductions in the value of portfolio securities, the fund may
purchase put options on the foreign currency. If the value of the currency does
decline, the fund will have the right to sell such currency for a fixed amount
in dollars and will thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of the
securities, the fund may purchase call options on such currency. The purchase of
options could offset, at least partially, the effects of the adverse movements
in currency exchange rates. As with other types of options, however, the benefit
the fund derives from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition, where
currency exchange rates do not move in the direction or to the extent
anticipated, the fund could sustain losses on transactions in foreign currency
options that would require the fund to forego a portion or all of the benefits
of advantageous changes in such rates.
The fund may also write options on foreign currencies for hedging purposes. For
example, where the fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to adverse fluctuations in currency exchange
rates the fund could, instead of purchasing a put option, write a call option on
the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the fund could write a
put option on the relevant currency. If currency exchange rates increase as
projected, the put option will expire unexercised and the premium received will
offset the increased cost. As with other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium received, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the fund
would be required to purchase or sell the underlying currency at a loss, which
may not be fully offset by the amount of the premium received. As a result of
writing options on foreign currencies, the fund may also be required to forego
all or a portion of the benefits that might otherwise have been obtained from
favorable changes in currency exchange rates.
All call options written on foreign currencies will be covered. A call option on
foreign currencies written by the fund is "covered" if the fund owns (or has an
absolute right to acquire) the underlying foreign currency covered by the call.
A call option is also covered if the fund has a call on the same foreign
currency in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the fund in cash and U.S. government securities
in a segregated account with its custodian.
The fund proposes to take advantage of investment opportunities in the area of
futures contracts and options on futures contracts that are not presently
contemplated for use by the fund or that are not currently available but which
may be developed in the future, to the extent such opportunities are both
consistent with the fund's investment goal and policies and are legally
permissible transactions for the fund. These opportunities, if they arise, may
involve risks that are different from those involved in the options and futures
activities described above.
FORWARD CURRENCY EXCHANGE CONTRACTS The fund may enter into forward currency
exchange contracts (Forward Contract(s)) to attempt to minimize the risk to the
fund from adverse changes in the relationship between currencies. A Forward
Contract is an obligation to buy or sell a specific currency for an agreed price
at a future date which is individually negotiated and privately traded by
currency traders and their customers.
The fund may construct an investment position by combining a debt security
denominated in one currency with a Forward Contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
Forward Contract) that is intended to be similar in overall performance to a
debt security denominated in the same currency.
For example, an Italian lira-denominated position could be constructed by buying
a German mark-denominated debt security and simultaneously entering into a
Forward Contract to exchange an equal amount of marks for lira at a future date
and at a specified exchange rate. With such a transaction, the fund may be able
to receive a return that is substantially similar from a yield and currency
perspective to a direct investment in lira debt securities while achieving other
benefits from holding the underlying security. The fund may experience slightly
different results from its use of such combined investment positions as compared
to its purchase of a debt security denominated in the particular currency
subject to the Forward Contract. This difference may be enhanced or offset by
premiums that may be available in connection with the Forward Contract.
The fund may also enter into a Forward Contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
Forward Contract to sell an amount of that foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency; or when the fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
The fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable debt securities
equal to the amount of the purchase will be held in segregated accounts with the
fund's custodian bank to be used to pay for the commitment, or the fund will
cover any commitments under these contracts to sell currency by owning the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS The fund may buy U.S. government
obligations and other securities on a "when-issued" or "delayed-delivery" basis.
These transactions are arrangements under which the fund 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 fund will generally buy securities on
a when-issued basis with the intention of acquiring the securities, it may sell
the securities before the settlement date if the fund deems it to be advisable.
When the fund 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 fund engages in when-issued and delayed-delivery transactions, it
does so only for the purpose of acquiring portfolio securities consistent with
its investment goal and policies and not for the purpose of investment leverage.
In when-issued and delayed-delivery transactions, the fund relies on the seller
to complete the transaction. The seller's failure to do so may cause the fund to
miss a price or yield considered advantageous. Securities purchased on a
when-issued or delayed-delivery basis generally do not earn interest until their
scheduled delivery date. The fund is not subject to any percentage limit on the
amount of its assets that may be invested in when-issued purchase obligations.
Entering into a when issued or delayed delivery transaction is a form of
leverage that may affect changes in net asset value to a greater extent.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase agreements
and other money market equivalents.
SHORT SELLING The fund may engage in short selling. In a short sale, the fund
sells a security it does not own in anticipation of a decline in the market
value of that security. To complete the transaction, the fund must borrow the
security to make delivery to the buyer. The fund is then obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. Until the security is replaced, the fund must pay the lender any
dividends or interest that accrues during the period of the loan. To borrow the
security, the fund may also be required to pay a premium, which would increase
the cost of the security sold. The proceeds of the short sale will be retained
by the broker, to the extent necessary to meet margin requirements, until the
short position is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
fund replaces the borrowed security, and the fund will realize a gain if the
security declines in price between those same dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the fund is required to pay in connection with
the short sale.
The fund will place in a segregated account with its custodian bank an amount
equal to the difference between (a) the market value of the securities sold
short at the time they were sold short and (b) any cash or securities required
to be deposited as collateral with the broker in connection with the short sale
(not including the proceeds from the short sale). The segregated account will be
marked-to-market daily and at no time will the amount deposited in the
segregated account and with the broker as collateral be less than the then
current market value of the securities sold short. Under amendments made by the
Revenue Act of 1997, entering into a short sale could cause immediate
recognition of gain (but not loss) on the date the constructive sale of an
appreciated financial position is entered.
REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian, securities with an initial market value of at least 102% of the
dollar amount invested by the fund in each repurchase agreement. The manager
will monitor the value of such securities daily to determine that the value
equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 331/3% of the value of the fund's total assets, measured at
the time of the most recent loan. For each loan, the borrower must maintain with
the fund's custodian collateral (consisting of any combination of cash,
securities issued by the U.S. government and its agencies and instrumentalities,
or irrevocable letters of credit) with a value at least equal to the current
market value of the loaned securities. The fund retains all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. The fund also continues to receive any distributions paid on the
loaned securities. The fund may terminate a loan at any time and obtain the
return of the securities loaned within the normal settlement period for the
security involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. The fund will loan its securities only to
parties who meet creditworthiness standards approved by the fund's board of
trustees, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
BORROWING The fund does not borrow money, except that the fund may borrow for
temporary or emergency purposes in an amount not to exceed 30% of its total
assets (including the amount borrowed). As a matter of non-fundamental policy,
the fund does not consider the purchase and/or sale of mortgage dollar rolls to
be a borrowing.
ILLIQUID INVESTMENTS The fund may invest up to 15% of its net assets in illiquid
securities. Illiquid securities are securities that cannot be disposed of within
seven days in the normal course of business at approximately the amount at which
the fund has valued the securities and include, among other things, repurchase
agreements of more than seven days duration and other securities which are not
readily marketable. Investments in savings deposits are generally considered
illiquid and will, together with other illiquid investments, not exceed 15% of
the fund's total net assets. Notwithstanding this limitation, the fund may
invest in securities that cannot be offered to the public for sale without first
being registered under the Securities Act of 1933, as amended (1933 Act)
(restricted securities), where such investment is consistent with the fund's
investment goals and the manager determines that there is a liquid institutional
or other market for such securities. For example, restricted securities that may
be freely transferred among qualified institutional buyers pursuant to Rule 144A
under the 1933 Act and for which a liquid institutional market has developed
will be considered liquid even though such securities have not been registered
pursuant to the 1933 Act.
The board of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the board of trustees
will take into account the following factors: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). To the extent the fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the 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, except that the fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) in an amount not exceeding
30% of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
objectives and policies, and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies, and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest. Except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, mortgages or
pledges, or (b) entering into options, futures contracts, forward contracts or
repurchase transactions.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities).
7. Purchase the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities), if immediately after such investment
(a) more than 5% of the value of the fund's total assets would be invested in
such issuer or (b) more than 10% of the outstanding voting securities of such
issuer would be owned by the fund, except that up to 25% of the value of such
fund's total assets may be invested without regard to such 5% and 10%
limitations.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
RISKS
There is no assurance that the fund will meet its investment goals. Investments
in securities that have potential to increase in value may be subject to a
greater degree of risk and may be more volatile than other types of investments.
The value of your shares will increase as the value of the securities owned by
the fund increases and will decrease as the value of the fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the fund. In addition to the factors that affect the value
of any particular security that the fund owns, the value of fund shares may also
change with movements in the stock market as a whole.
INTEREST RATE Because the fund invests primarily in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
MORTGAGE SECURITIES The fund's investment in mortgage-backed securities differs
from conventional debt securities because principal is paid back over the life
of the security rather than at maturity. The fund may receive unscheduled
prepayments of principal due to voluntary prepayments, refinancing or
foreclosure on the underlying mortgage loans. During periods of declining
interest rates, the volume of principal prepayments generally increases as
borrowers refinance their mortgages at lower rates. The fund may be forced to
reinvest returned principal at lower interest rates, reducing the fund's income.
For this reason, mortgage-backed securities may be less effective than other
types of securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other investments with similar maturities. A reduction in the
anticipated rate of principal prepayments, especially during periods of rising
interest rates, may increase the effective maturity of mortgage-backed
securities, making them more susceptible than other debt securities to a decline
in market value when interest rates rise. This could increase the volatility of
the fund's returns and share price.
To the extent mortgage securities are purchased at a premium, unscheduled
principal prepayments, including prepayments resulting from mortgage
foreclosures, may result in some loss of the holder's principal investment to
the extent of the premium paid. On the other hand, if mortgage securities are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current and total returns and
will accelerate the recognition of income which, when distributed to you, will
be taxable as ordinary income.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Investments in depositary receipts also involve some or all of
the risks described below. You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition to
the usual risks inherent in domestic investments.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), restrictions on removal of assets, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than those
in the U.S. or other major economies. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. Foreign markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. Settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
The fund's investments in foreign securities may increase the risks with respect
to the liquidity of the fund's portfolio. This could inhibit the fund's ability
to meet a large number of shareholder redemption requests in the event of
economic or political turmoil in a country in which the fund has a substantial
portion of its assets invested or deterioration in relations between the U.S.
and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict the fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (viii) foreign taxation; (ix)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (x)
the absence of a capital market structure or market-oriented economy; and (xi)
the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
CURRENCY Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
HIGH YIELD SECURITIES Because the 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 fund invests.
Accordingly, an investment in the fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and objectives.
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 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 fund's net asset
value may be adversely affected before an issuer defaults. In addition, the fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund.
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 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 fund's portfolio.
The 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 fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The fund may 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 fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any other
person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth 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 fund's net asset value.
The fund relies on the manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the manager takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The risk factors above also apply to lower-quality zero-coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, the fund will not receive any cash until the cash payment date. If the
issuer defaults, the fund may not obtain any return on its investment.
Zero-coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the cash payment date), and therefore
are generally issued and traded at a discount from their face amount or par
value. The discount varies depending on the time remaining until maturity or the
cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.
The value of zero-coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality.
DERIVATIVE SECURITIES
FUTURES CONTRACTS Futures contracts entail risks. Although the fund believes
that use of such contracts will benefit the fund, if the manager's investment
judgment about pertinent market movements is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the fund will lose part or all of
the benefit of the increased value of its bonds which it has hedged because it
will have offsetting losses in its futures positions. Similarly, if the fund
sells a foreign currency futures contract and the U.S. dollar value of the
currency unexpectedly increases, the fund will lose the beneficial effect of the
increase on the value of the security denominated in that currency. In addition,
in such situations, if the fund has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements. These
sales may be, but will not necessarily be, at increased prices which reflect the
rising market. The fund may have to sell securities at a time when it may be
disadvantageous to do so.
The fund's ability to hedge effectively all or a portion of its securities
through transactions in financial futures and related options also depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the fund's
portfolio. Inasmuch as these securities will not duplicate the components of any
index or underlying securities, the correlation will not be perfect.
Consequently, the fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Positions in financial futures and related options may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close a
futures or option position. The inability to close futures or options positions
could have an adverse impact on the fund's ability to effectively hedge its
securities. The fund will enter into a futures or option position only if there
appears to be a liquid secondary market for such futures or option.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The fund does not believe that these trading and positions limits
will have an adverse impact on the fund's futures strategies.
OPTIONS ON FUTURES The amount of risk the fund assumes when it purchases an
option on a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased.
ADDITIONAL RISKS OF FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, AND
OPTIONS ON FUTURES CONTRACTS Forward Contracts are not traded on contract
markets regulated by the CFTC or by the SEC. The ability of the fund to use
Forward Contracts could be restricted to the extent that Congress authorized the
CFTC or the SEC to regulate such transactions. Forward Contracts are traded
through financial institutions acting as market makers.
The fund may enter into forward currency exchange contracts in order to limit
the risk from adverse changes in the relationship between currencies. However,
these contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.
The purchase and sale of exchange-traded foreign currency options are subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, margins of options written, the nature of the
foreign currency market, possible intervention by governmental authorities, and
the effects of other political and economic events.
Futures contracts on currencies, options on futures contracts, and options on
foreign currencies may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions could also be adversely
affected by (i) other foreign political and economic factors, (ii) less
available data than in the U.S. on which to base trading decisions, (iii) delays
in the fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the U.S., (iv) the imposition of exercise and
settlement terms and procedures, and margin requirements different from those in
the U.S., and (v) lesser trading volume.
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.
REPURCHASE AGREEMENT The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, the fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by the fund not within the
control of the fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the manager
acknowledges these risks, it is expected that if repurchase agreements are
otherwise deemed useful to the fund, these risks can be controlled through
careful monitoring procedures.
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
S. Joseph Fortunato (67)
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman
(1995-1997) and Trustee (1993-1997), National Child Research Center, Assistant
to the President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and Public
Liaison - United States Treasury Department (1988-1989).
*Edward B. Jamieson (51)
777 Mariners Island Blvd., San Mateo, CA 94404
President and Trustee
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
Chairman of the Board and Trustee
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President and Trustee
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
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 51 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
Trustee
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Reclamation (redevelopment); director or trustee, as
the case may be, of 27 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee, as
the case may be, of 47 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chairman, White River Corporation (financial
services) (until 1998) and Hambrecht and Quist Group (investment banking) (until
1992), President, National Association of Securities Dealers, Inc. (until 1987).
Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton Services,
Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin
Investment Advisory Services, Inc. and 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 51 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President and Chief Financial Officer
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 51 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
Secretary
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Senior Vice
President and General Counsel, Franklin Resources, Inc., Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.,
Executive Vice President, Franklin Advisers, Inc., Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC, and Vice President,
Chief Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 51 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 33 of the investment companies in the Franklin
Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Vice President, Franklin Templeton Services, Inc.; and officer of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 51 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON GROUP OF
TOTAL FEES THE FRANKLIN FUNDS ON WHICH
RECEIVED FROM THE TEMPLETON GROUP OF EACH SERVES3
NAME TRUST1 ($) FUNDS2 ($)
- --------------------------------------------------------------------------------
Frank Abbott, III 10,209 156,060 27
Harris Ashton 11,227 363,165 47
S. Joseph Fortunato 10,459 363,238 49
Edith E. Holiday 12,900 237,265 24
Frank W.T. LaHaye 10,209 156,060 27
Gordon Macklin 11,227 363,165 47
1. For the fiscal year ended October 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
The fund's sub-advisor is Templeton Investment Counsel, Inc., through its Global
Bond Managers division. The sub-advisor has an agreement with the manager and
provides the manager with investment management advice and assistance. The
sub-advisor's activities are subject to the board's review and control, as well
as the manager's instruction and supervision.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.425% of the value of net assets up to and including $500 million;
o 0.325% of the value of net assets over $500 million and not over $1
billion; and
o 0.280% of the value of net assets over $1 billion and not over $1.5
billion;
o 0.235% of the value of net assets over $1.5 billion and not over $6.5
billion;
o 0.215% of the value of net assets over $6.5 billion and not over $11.5
billion;
o 0.200% of the value of net assets over $11.5 billion and not over $16.5
billion;
o 0.190% of the value of net assets over $16.5 billion and not over $19
billion;
o 0.180% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.170% of the value of net assets in excess of $21.5 billion.
The fee is computed according to the terms of the management agreement. Each
class of the fund's shares pays its proportionate share of the fee.
For the last two fiscal years ended October 31, the fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
- -----------------------------
1999 1 0
1998 2 0
1. Management fees, before any advance waiver, totaled $142,878. Under an
agreement by the manager to waive its fees, the fund paid the management fees
shown.
2. For the period from August 3, 1998 (inception) through October 31, 1998,
management fees, before any advance waiver, totaled $24,877. Under an agreement
by the manager to waive its fees, the fund paid the management fees shown.
The manager pays the sub-advisor a fee equal to a monthly rate of 25% of the
investment advisory fee paid to the manager by the fund. The manager pays this
fee from the management fees it receives from the fund. For the last two fiscal
years ended October 31, the manager paid the following sub-advisory fees:
SUB-ADVISORY
FEES PAID1 ($)
- ------------------------------
1999 0
1998 0
1. For the fiscal year ended October 31, 1999, and for the period from August 3,
1998 (inception) through October 31, 1998, sub-advisory fees, before any advance
waiver, totaled $2,540 and $293, respectively. Under an agreement by the
sub-advisor to waive its fees, the manager paid the sub-advisory fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the fund to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an annual
rate of 0.20% of the average daily net assets of the fund.
During the last two fiscal years ended October 31, the fund paid FT Services the
following administration fees:
ADMINISTRATION
FEES PAID1 ($)
- ------------------------------
1999 0
1998 0
1. For the fiscal year ended October 31, 1999, and for the period from August 3,
1998, (inception) through October 31, 1998, administration fees, before any
advance waiver, totaled $67,330 and 11,707, respectively. Under an agreement by
FT Services to waive its fees, the fund paid the administration fees shown.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The fund
also will 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 will not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the manager to supplement its own research and analysis
activities and to receive the views and information of individuals and research
staffs of other securities firms. As long as it is lawful and appropriate to do
so, the manager and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the fund's officers are
satisfied that the best execution is obtained, the sale of fund shares, as well
as shares of other funds in the Franklin Templeton Group of Funds, also may be
considered a factor in the selection of broker-dealers to execute the fund's
portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the last two fiscal years ended October 31, the fund paid the following
brokerage commissions:
BROKERAGE
COMMISSIONS ($)
- --------------------------------------
1999 3,964
1998 1 30,383
1. For the period from August 3, 1998 (inception) through October 31, 1998.
For the fiscal year ended October 31, 1999, the fund did not pay brokerage
commissions to brokers who provided research services.
As of October 31, 1999, the fund owned securities issued by Prudential Bache
Securities valued in the aggregate at $667,000. Except as noted, the fund did
not own any securities issued by its regular broker-dealers as of the end of the
fiscal year.
DISTRIBUTIONS AND TAXES
The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in any distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of interest on its investments. This income, less expenses incurred in the
operation of the fund, constitutes the fund's net investment income from which
dividends may be paid to you. Any distributions by the fund from such income
will be taxable to you as ordinary income, whether you take them in cash or in
additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or decrease the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. This, in turn, could reduce ordinary income
distributions to you.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. If you hold your shares
as a capital asset, the gain or loss that you realize will be capital gain or
loss and will be long-term or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
Any loss incurred on the redemption or exchange of shares held for six months or
less will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares. All or a portion
of any loss that you realize upon the redemption of your fund shares will be
disallowed to the extent that you buy other shares in the fund (through
reinvestment of dividends or otherwise) within 30 days before or after your
share redemption. Any loss disallowed under these rules will be added to your
tax basis in the new shares you buy.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that must be met
by the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from interest rather than dividends, generally none of its
distributions will be eligible for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund (possibly causing the fund to sell securities to raise the cash for
necessary distributions) and/or defer the fund's ability to recognize losses
and, in limited cases, subject the fund to U.S. federal income tax on income
from certain foreign securities. In turn, these rules may affect the amount,
timing or character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
The fund is a diversified series of Franklin Investors Securities Trust, an
open-end management investment company, commonly called a mutual fund. The trust
was organized as a Massachusetts business trust on December 22, 1986, and is
registered with the SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the fund. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of the
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that the fund shall, upon request, assume the
defense of any claim made against you for any act or obligation of the fund and
satisfy any judgment thereon. All such rights are limited to the assets of the
fund. The Declaration of Trust further provides that the fund may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the fund, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Furthermore,
the activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The fund currently offers two classes of shares, Class A and Advisor Class. The
fund may offer additional classes of shares in the future. The full title of
each class is:
o Franklin Bond Fund - Class A
o Franklin Bond Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole. Additional series may be
offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.
As of February 1, 2000, the principal shareholders of the fund, beneficial or of
record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS (%)
BOND FUND
Franklin Templeton Fund Allocator
Conservative Target Fund
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470 Advisor 20.34
Franklin Templeton Fund Allocator
Moderate Target Fund
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470 Advisor 40.43
Franklin Templeton Fund Allocator
Growth Target Fund
1810 Gateway 3rd Floor
San Mateo, CA 94404-2470 Advisor 19.93
Franklin Resources, Inc.
555 Airport Blvd., 4th Floor
Burlingame, CA 94010 Advisor 18.37
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and
trustees of the trust, may be considered beneficial holders of the fund shares
held by Franklin Resources, Inc. (Resources). As principal shareholders of
Resources, they may be able to control the voting of Resources' shares of the
fund.
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As of February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank. We may deduct any applicable banking charges
imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
DEALER COMPENSATION Distributors and/or its affiliates may provide financial
support to 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
and/or total assets with the Franklin Templeton Group of Funds. The amount of
support may be affected by: total sales; net sales; levels of redemptions; the
proportion of a securities dealer's sales and marketing efforts in the Franklin
Templeton Group of Funds; a securities dealer's support of, and participation
in, Distributors' marketing programs; a securities dealer's compensation
programs for its registered representatives; and the extent of a securities
dealer's marketing programs relating to the Franklin Templeton Group of Funds.
Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, accrued but unpaid income dividends and capital gain distributions will
be reinvested in the fund at net asset value on the date of the exchange, and
then the entire share balance will be exchanged into the new fund. Backup
withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem illiquid
securities in kind. If this happens, however, you may not be able to recover
your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
When you buy and sell shares, you pay the net asset value (NAV) per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
PERFORMANCE
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the fund are
based on the standardized methods of computing performance mandated by the SEC.
An explanation of these and other methods used by the fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended October 31,
1999, were:
SINCE
INCEPTION
1 YEAR (%) (8/3/98) (%)
- -------------------------------------- ---------------- -----------------
Advisor Class -0.46 2.93
The following SEC formula was used to calculate these figures:
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, the account was completely redeemed at the end of each period
and the deduction of all applicable charges and fees. Cumulative total return,
however, is based on the actual return for a specified period rather than on the
average return over the periods indicated above. The cumulative total returns
for the indicated periods ended October 31, 1999, were:
SINCE
INCEPTION
1 YEAR (%) (8/3/98) (%)
- --------------------------------------- ----------------- ---------------
Advisor Class -0.46 3.69
CURRENT YIELD Current yield shows the income per share earned by the fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the net asset value per share on the last day of the
period and annualizing the result. Expenses accrued for the period include any
fees charged to all shareholders of the class during the base period. The yield
for the 30-day period ended October 31, 1999, was:
YIELD (%)
- ------------------------- -----------------------
Advisor Class 7.44
The following SEC formula was used to calculate this figure:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the net asset value per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current net asset value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rate for the 30-day period ended October 31, 1999, was:
DISTRIBUTION
RATE (%)
- -------------------------------------------------
Advisor Class 6.74
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the fund
as a potential investment for IRAs, business retirement plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
o Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
o Financial publications: The Wall Street Journal, and Business Week,
Financial World, Forbes, Fortune, and Money magazines - provide performance
statistics over specified time periods.
o Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers(R) and Bloomberg(R) L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, as well as the value of its shares that
are based upon the value of such portfolio investments, can be expected to fall.
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 to have a
projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $235 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 U.S. based open-end investment companies to the public. The
fund may identify itself by its Nasdaq symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/
or repayment of principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
This page intentionally left blank.
FRANKLIN INVESTORS SECURITIES TRUST
FILE NOS. 33-11444 &
811-4986
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(A) ARTICLES OF INCORPORATION
(i) Agreement and Declaration of Trust dated December 16, 1986
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iii) Certificate of Amendment of Agreement and Declaration of
Trust dated March 13, 1990
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iv) Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1989
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 26, 1998
(B) BY-LAWS
(i) By-Laws
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Amendment to By-Laws dated January 18, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated April 15, 1987
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Administration Agreement between Registrant, on behalf of
Franklin Adjustable U.S. Government Securities Fund, and
Franklin Advisers, Inc. dated June 3, 1991
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iii) Subadvisory Agreement between Franklin Advisers, Inc., on
behalf of Franklin Investors Securities Trust (on behalf of
its series: Franklin Global Government Income Fund), and
Templeton Investment Counsel, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iv) Amendment dated August 1, 1995 to the Administration
Agreement between Registrant, on behalf of Franklin
Adjustable U.S. Government Securities Fund, and Franklin
Advisers, Inc. dated June 3, 1991
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(v) Investment Advisory Agreement between Registrant, on
behalf of Franklin Bond Fund, and Franklin Advisers, Inc.
dated July 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(vi) Subadvisory Agreement between Franklin Advisers, Inc., on
behalf of Franklin Investors Securities Trust (on behalf of
its series: Franklin Bond Fund), and Templeton Investment
Counsel, Inc. dated July 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(E) UNDERWRITING CONTRACTS
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(iii) Amendment of Amended and Restated Distribution Agreement
between Registrant and Franklin/Templeton Distributors,
Inc. dated January 12, 1999
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
(G) CUSTODIAN AGREEMENTS
(i) Global Custody Agreement between The Chase Manhattan Bank,
N.A. and Franklin Investors Securities Trust, on behalf of
Franklin Global Government Income Fund, dated July 28, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(ii) Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996
(iii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 18 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: November 27, 1996
(iv) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 26, 1998
(v) Amendment dated February 27, 1998 to Exhibit A of the
Master Custody Agreement between the Registrant and Bank
of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(vi) Foreign Custody Manager Agreement between the Registrant
and Bank of New York made as of July 30, 1998, effective
as of February 27, 1998 Filing: Post-Effective Amendment
No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(vii) Amendment dated September 16, 1999 to Exhibit A of the
Master Custody Agreement
(H) OTHER MATERIAL CONTRACTS
(i) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated April 30, 1998 between
Franklin Advisers, Inc.
and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(ii) Fund Administration Agreement between Registrant, on behalf
of Franklin Bond Fund, and Franklin Templeton Services, Inc.
dated July 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel dated December 14, 1998
Filing: Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(J) OTHER OPINIONS
(i) Consent of Independent Auditors
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
(i) Letter of Understanding relating to Franklin Global
Government Income Fund - Class II and Franklin Equity
Income Fund - Class II dated April 12, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Letter of Understanding relating to Franklin Bond Fund
dated July 24, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(M) RULE 12B-1 PLAN
(i) Distribution Plan between Registrant, on behalf of
Franklin Global Government Income Fund, and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(ii) Distribution Plan between Registrant, on behalf of Franklin
Short-Intermediate U.S. Government Securities Fund, and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iii) Distribution Plan between Registrant, on behalf of Franklin
Convertible Securities Fund, and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(iv) Amended and Restated Distribution Plan between Registrant,
on behalf of Franklin Adjustable U.S. Government Securities
Fund, and Franklin/Templeton Distributors, Inc. dated
July 1, 1993
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(v) Distribution Plan between Registrant, on behalf of
Franklin Equity Income Fund, and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(vi) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Global Government Income
Fund, and Franklin/Templeton Distributors, Inc. dated
March 30, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: April 24, 1995
(vii) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Convertible Securities
Fund, and Franklin/Templeton Distributors, Inc. dated
September 29, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(viii) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Equity Income Fund, and
Franklin/Templeton Distributors, Inc. dated March 30, 1995
Filing: Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1995
(ix) Class B Distribution Plan pursuant to Rule 12b-1 between
Registrant, on behalf of Franklin Equity Income Fund -
Class B, and Franklin/Templeton Distributors, Inc.,
dated October 16, 1998
(x) Distribution Plan between Registrant, on behalf of
Franklin Bond Fund, and Franklin/Templeton Distributors,
Inc., dated July 16, 1998
(O) RULE 18F-3 PLAN
(i) Multiple Class Plan for Franklin Global Government Income
Fund dated June 18, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 31, 1996
(ii) Multiple Class Plan for Franklin Short-Intermediate U.S.
Government Securities Fund dated June 18, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 31, 1996
(iii) Multiple Class Plan for Franklin Convertible Securities
Fund dated August 15, 1995
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: February 28, 1997
(iv) Multiple Class Plan for Franklin Equity Income Fund dated
March 16, 1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(v) Multiple Class Plan for Franklin Bond Fund dated July 16,
1998
Filing: Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A
File No. 33-11444
Filing Date: December 29, 1998
(P) POWER OF ATTORNEY
(i) Power of Attorney for Franklin Investors Securities Trust
dated February 15, 2000
(ii) Certificate of Secretary for Franklin Investors Securities
Trust dated February 28, 2000
(iii) Power of Attorney for Adjustable Rate Securities Portfolios
dated February 15, 2000
(iv) Certificate of Secretary for Adjustable Rate Securities
Portfolios dated February 28, 2000
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
THE FUND
None
ITEM 25 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) The officers and directors of the Registrant's manager, Administrator, and
the Master Fund's investment adviser, Franklin Advisers, Inc. (Advisers) also
serve as officers and/or directors for (1) Advisers' corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson was formerly a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Form ADV of Advisers (SEC File 801-26292), incorporated
herein by reference, which sets forth the officers and directors of Advisers and
information as to any business, profession, vocation or employment of a
substantial nature engaged in by those officers and directors during the past
two years.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc., an indirect, wholly owned subsidiary of
Franklin Resources, Inc., serves as the Franklin Bond Fund and 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
Templeton Investment Counsel, Inc. (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 engaged in by those officers and directors during the past
two years.
ITEM 27 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as principal
underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Variable Insurance Products Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
c) Not Applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA. 94404.
ITEM 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30 UNDERTAKINGS
Not Applicable
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 29th day
of February, 2000.
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 29, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: February 29, 2000
KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: February 29, 2000
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: February 29, 2000
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 29, 2000
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 29, 2000
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: February 29, 2000
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 29, 2000
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: February 29, 2000
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: February 29, 2000
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 29, 2000
*By /s/ David P. Goss
Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the undersigned has duly consented to the
filing of this Registration Statement of Franklin Investors Securities Trust and
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of San Mateo and the State of
California, on the 29th day of February, 2000.
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 29, 2000
MARTIN L. FLANAGAN Principal Financial Officer
Martin L. Flanagan Dated: February 29, 2000
KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: February 29, 2000
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 29, 2000
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: February 29, 2000
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 29, 2000
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 29, 2000
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: February 29, 2000
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: February 29, 2000
WILLIAM J. LIPPMAN* Trustee
William J. Lippman Dated: February 29, 2000
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 29, 2000
*By /s/ David P. Goss
Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)
FRANKLIN INVESTORS SECURITIES TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust dated December 16, *
1986
EX-99.(a)(ii) Certificate of Amendment of Agreement and Declaration *
of Trust dated March 21, 1995
EX-99.(a)(iii) Certificate of Amendment of Agreement and Declaration *
of Trust dated March 13, 1990
EX-99.(a)(iv) Certificate of Amendment of Agreement and Declaration *
of Trust dated March 21, 1989
EX-99.(b)(i) By-Laws *
EX-99.(b)(ii) Amendment to By-Laws dated January 18, 1994 *
EX-99.(d)(i) Management Agreement between Registrant and Franklin *
Advisers, Inc. dated April 15, 1987
EX-99.(d)(ii) Administration Agreement between Registrant, on behalf *
of Franklin Adjustable U.S. Government Securities Fund,
and Franklin Advisers, Inc. dated June 3, 1991
EX-99.(d)(iii) Subadvisory Agreement between Franklin Advisers, Inc., *
on behalf of Franklin Investors Securities Trust (on
behalf of its series: Franklin Global Government Income
Fund), and Templeton Investment Counsel, Inc. dated May
1, 1994
EX-99.(d)(iv) Amendment dated August 1, 1995 to the Administration *
Agreement between Registrant, on behalf of Franklin
Adjustable U.S. Government Securities Fund, and
Franklin Advisers, Inc. dated June 3, 1991
EX-99.(d)(v) Investment Advisory Agreement between Registrant, on *
behalf of Franklin Bond Fund, and Franklin Advisers,
Inc. dated July 16, 1998
EX-99.(d)(vi) Subadvisory Agreement between Franklin Advisers, Inc., *
on behalf of Franklin Investors Securities Trust (on
behalf of its series: Franklin Bond Fund), and
Templeton Investment Counsel, Inc. dated July 16, 1998
EX-99.(e)(i) Amended and Restated Distribution Agreement between *
Registrant and Franklin/Templeton Distributors, Inc.
dated March 29, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between Franklin/Templeton *
Distributors, Inc. and Securities Dealers
EX-99.(e)(iii) Amendment of Amended and Restated Distribution Attached
Agreement between Registrant and Franklin/Templeton
Distributors, Inc. dated January 12, 1999
EX-99.(g)(i) Global Custody Agreement between The Chase Manhattan *
Bank, N.A. and Franklin Investors Securities Trust, on
behalf of Franklin Global Government Income Fund, dated
July 28, 1995
EX-99.(g)(ii) Master Custody Agreement between Registrant and Bank of *
New York dated February 16, 1996
EX-99.(g)(iii) Terminal Link Agreement between Registrant and Bank of *
New York dated February 16, 1996
EX-99.(g)(iv) Amendment dated May 7, 1997 to Master Custody *
Agreement between Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(v) Amendment dated February 27, 1998 to Exhibit A of the *
Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
EX-99.(g)(vi) Foreign Custody Manager Agreement between Registrant *
and Bank of New York made as of July 30, 1998,
effective as of February 27, 1998
EX-99.(g)(vii) Amendment dated September 16, 1999 to Exhibit A of Attached
the Master Custody Agreement
EX-99.(h)(i) Subcontract for Fund Administrative Services dated *
October 1, 1996 and Amendment thereto dated April 30,
1998 between Franklin Advisers, Inc. and Franklin
Templeton Services, Inc.
EX-99.(h)(ii) Fund Administration Agreement between Registrant, on *
behalf of Franklin Bond Fund, and Franklin Templeton
Services, Inc. dated July 16, 1998
EX-99.(i)(i) Opinion and Consent of Counsel dated December 14, 1998 *
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(l)(i) Letter of Understanding relating to Franklin Global *
Government Income Fund - Class II and Franklin Equity
Income Fund - Class II dated April 12, 1995
EX-99.(l)(ii) Letter of Understanding relating to Franklin Bond Fund *
dated July 24, 1998
EX-99.(m)(i) Distribution Plan between Registrant, on behalf of *
Franklin Global Government Income Fund, and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
EX-99.(m)(ii) Distribution Plan between Registrant, on behalf of *
Franklin Short-Intermediate U.S. Government Securities
Fund, and Franklin/Templeton Distributors, Inc. dated
May 1, 1994
EX-99.(m)(iii) Distribution Plan between Registrant, on behalf of *
Franklin Convertible Securities Fund, and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
EX-99.(m)(iv) Amended and Restated Distribution Plan between *
Registrant, on behalf of Franklin Adjustable U.S.
Government Securities Fund, and Franklin/Templeton
Distributors, Inc. dated July
1, 1993
EX-99.(m)(v) Distribution Plan between Registrant, on behalf of *
Franklin Equity Income Fund, and Franklin/Templeton
Distributors, Inc. dated May
1, 1994
EX-99.(m)(vi) Class II Distribution Plan pursuant to Rule 12b-1 *
between Registrant, on behalf of Franklin Global
Government Income Fund, and Franklin/Templeton
Distributors, Inc. dated March 30, 1995
EX-99.(m)(vii) Class II Distribution Plan pursuant to Rule 12b-1 *
between Registrant, on behalf of Franklin Convertible
Securities Fund, and Franklin/Templeton Distributors,
Inc. dated September 29, 1995
EX-99.(m)(viii) Class II Distribution Plan pursuant to Rule 12b-1 *
between Registrant, on behalf of Franklin Equity Income
Fund, and Franklin/Templeton Distributors, Inc. dated
March 30, 1995
EX-99.(m)(ix) Class B Distribution Plan pursuant to Rule 12b-1 Attached
between Registrant, on behalf of Franklin
Equity Income Fund - Class B, and Franklin/Templeton
Distributors, Inc., dated October 16, 1998
EX-99.(m)(x) Distribution Plan between Registrant, on behalf of Attached
Franklin Bond Fund, and Franklin/Templeton
Distributors, Inc., dated July 16, 1998
EX-99.(o)(i) Multiple Class Plan for Franklin Global Government *
Income Fund dated June 18, 1996
EX-99.(o)(ii) Multiple Class Plan for Franklin Short-Intermediate *
U.S. Government Securities Fund dated June 18, 1996
EX-99.(o)(iii) Multiple Class Plan for Franklin Convertible Securities *
Fund dated August 15, 1995
EX-99.(o)(iv) Form of Multiple Class Plan for Franklin Equity Income *
Fund
EX-99.(o)(v) Multiple Class Plan for Franklin Bond Fund dated July *
16, 1998
EX-99.(p)(i) Power of Attorney for Franklin Investors Securities Attached
Trust dated February 15, 2000
EX-99.(p)(ii) Certificate of Secretary for Franklin Investors Attached
Securities Trust dated February 28, 2000
EX-99.(p)(iii) Power of Attorney for Adjustable Rate Securities Attached
Portfolios dated February 15, 2000
EX-99.(p)(iv) Certificate of Secretary for Adjustable Rate Attached
Securities Portfolios dated February 28, 2000
*Incorporated by Reference
FRANKLIN INVESTORS SECURITIES TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares are
registered under the Securities Act of 1933, as amended (the "1933 Act"). You
have informed us that your company is registered as a broker-dealer under the
provisions of the Securities Exchange Act of 1934, as amended (the "1934 Act")
and that your company is a member of the National Association of Securities
Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Amended and Restated
Distribution Agreement (the "Agreement") currently in effect between you and us.
As used herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to you
by a resolution of our Board passed at a meeting at which a majority of Board
members, including a majority who are not otherwise interested persons of the
Fund and who are not interested persons of our investment adviser, its related
organizations or of you or your related organizations, were present and voted in
favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any provision
of the Agreement, the Amendment provision supersedes the Agreement provision.
The Agreement and the Amendment together constitute the entire agreement between
the parties hereto and supersede all prior oral or written agreements between
the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan applicable to
Class B Shares (the "Class B Plan") is divided into a distribution fee and
a service fee, each of which fees is in compensation for different
services to be rendered to the Fund. Subject to the termination provisions
in the Class B Plan, the distribution fee with respect to the sale of a
Class B Share shall be earned when such Class B Share is sold and shall be
payable from time to time as provided in the Class B Plan. The
distribution fee payable to you as provided in the Class B Plan shall be
payable without offset, defense or counterclaim (it being understood by
the parties hereto that nothing in this sentence shall be deemed a waiver
by the Fund of any claim the Fund may have against you). You may direct
the Fund to cause our custodian to pay such distribution fee to Lightning
Finance Company Limited ("LFL") or other persons providing funds to you to
cover expenses referred to in Section 2(a) of the Class B Plan and to
cause our custodian to pay the service fee to you for payment to dealers
or others or directly to others to cover expenses referred to in Section
2(b) of the Class B Plan.
We understand that you intend to assign your right to receive certain
distribution fees with respect to Class B Shares to LFL in exchange for
funds that you will use to cover expenses referred to in Section 2(a) of
the Class B Plan. In recognition that we will benefit from your
arrangement with LFL, we agree that, in addition to the provisions of
Section 7 (iii) of the Class B Plan, we will not pay to any person or
entity, other than LFL, any such assigned distribution fees related to
Class B Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding sentence shall
survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of Shares of
each series and class of the Fund as provided in Subsection 4.A. above, we
will cause our shareholder services agent (the "Transfer Agent") to
withhold from redemption proceeds payable to holders of the Shares all
contingent deferred sales charges properly payable by such holders in
accordance with the terms of our then current prospectuses and statements
of additional information (each such sales charge, a "CDSC"). Upon receipt
of an order for redemption, the Transfer Agent shall direct our custodian
to transfer such redemption proceeds to a general trust account. We shall
then cause the Transfer Agent to pay over to you or your assigns from the
general trust account such CDSCs properly payable by such holders as
promptly as possible after the settlement date for each such redemption of
Shares. CDSCs shall be payable without offset, defense or counterclaim (it
being understood that nothing in this sentence shall be deemed a waiver by
us of any claim we may have against you.) You may direct that the CDSCs
payable to you be paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the reference
in the second paragraph to "Rules of Fair Practice" with a reference to the
"Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules and
Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN INVESTORS SECURITIES TRUST
By: /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: January 12, 1999
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Adjustable Rate Securities Delaware Business U.S. Government Adjustable Rate Mortgage
Portfolios Trust Portfolio
Franklin Asset Allocation Fund Delaware Business
Trust
Franklin California Tax-Free Maryland Corporation
Income
Fund, Inc.
Franklin California Tax-Free Massachusetts Franklin California Insured Tax-Free
Trust Business Trust Income 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 California
Income Fund Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Franklin Gold Fund California
Corporation
Franklin High Income Trust Delaware Business AGE High Income Fund
Trust
Franklin Investors Securities Massachusetts Franklin Global Government Income Fund
Trust Business Trust Franklin Short-Intermediate U.S. Govt
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government
Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Franklin Rising Dividends Fund
Trust
Franklin Money Fund California
Corporation
Franklin Municipal Securities Delaware Business Franklin California High Yield Municipal
Trust Trust Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Maryland Corporation Mutual Shares Fund
Inc. Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Delaware Business
Income Fund Trust
Franklin New York Tax-Free Massachusetts Franklin New York Tax-Exempt Money Fund
Trust Business Trust Franklin New York Intermediate-Term
Tax-Free
Income Fund
Franklin New York Insured Tax-Free
Income Fund
Franklin Real Estate Delaware Business Franklin Real Estate Securities Fund
Securities Trust Trust
Franklin Strategic Mortgage Delaware Business
Portfolio Trust
Franklin Strategic Series Delaware Business Franklin California Growth Fund
Trust 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 U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Tax-Exempt Money Fund California
Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Franklin Massachusetts Insured Tax-Free
Business Trust Income 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 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
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Delaware Business Franklin Templeton Conservative Target
Allocator Series Trust Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Franklin Templeton Global Currency Fund
Trust Franklin Templeton Hard Currency Fund
Franklin Templeton Delaware Business Templeton Pacific Growth Fund
International Trust Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Delaware Business Franklin Templeton Money Fund
Trust Trust
Franklin Value Investors Trust Massachusetts Franklin Balance Sheet Investment Fund
Business Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Templeton Variable Massachusetts Franklin Money Market Fund
Insurance Products Trust Business Trust Franklin Growth and Income Fund
Franklin Natural Resources Securities
Fund
Franklin Real Estate Fund
Franklin Global Communications
Securities Fund
Franklin High Income Fund
Templeton Global Income Securities Fund
Franklin Income Securities Fund
Franklin U.S. Government Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Franklin Rising Dividends Securities Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Variable Massachusetts Templeton Pacific Growth Fund
Insurance Products Trust Business Trust Templeton International Equity Fund
(cont.) Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Franklin Small Cap Fund
Franklin Large Cap Growth Securities Fund
Templeton International Smaller
Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Franklin Global Health Care Securities
Fund
Franklin Value Securities Fund
Franklin Aggressive Growth Securities
Fund
- -----------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Money Market Portfolio
Business Trust Franklin U.S. Government Securities
Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business The Money Market Portfolio
Trust The U.S. Government Securities Money
Market Portfolio
Templeton Variable Products Franklin Growth Investments Fund
Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts
Business Trust
Franklin Universal Trust Massachusetts
Business Trust
Franklin Floating Rate Trust Delaware Business
Trust
- -----------------------------------------------------------------------------------------------
</TABLE>
Revised: 9/16/99
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 27
to the Registration Statement of Franklin Investors Securities Trust on Form
N-1A, File No. 33-11444, of our reports dated December 6, 1999, on our audits of
the financial statements and financial highlights of Franklin Investors
Securities Trust and Adjustable Rate Securities Portfolios, which reports are
included in the Annual Report to Shareholders for the year ended October 31,
1999, filed with the Securities and Exchange Commission pursuant to section
30(d) of the Investment Company Act of 1940, which is incorporated by reference
in the Registration Statement. We also consent to the reference to our firm
under the captions "Financial Highlights" and "Auditor."
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
February 25, 2000
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN INVESTORS SECURITIES TRUST
II. Fund: FRANKLIN EQUITY INCOME FUND - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares (as a percentage of
average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Trustees of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement
with a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund
shall pay (i) to Distributors for payment to dealers or others, or (ii) directly
to others, an amount not to exceed the above-stated maximum service fee per
annum of the Class' average daily net assets represented by shares of the Class,
as may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each
such Transfer by providing the Fund with the name and address of each such
Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1
Portion directly to each Assignee. In such event, Distributors shall provide the
Fund with a monthly calculation of the amount to which each Assignee is entitled
(the "Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may
direct the Fund to pay all or a portion of the fees to which Distributors is
entitled from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: OCTOBER, 16, 1998
FRANKLIN INVESTORS SECURITIES TRUST
By: /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
FRANKLIN INVESTORS SECURITIES TRUST
ON BEHALF OF FRANKLIN BOND FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by Franklin
Investors Securities Trust ("Trust") for the use of the Class I shares of its
series named Franklin Bond Fund (the "Fund"), which Plan shall take effect on
the date the shares of the Fund are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Trustees of the
Trust (the "Board"), including a majority of the trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plan (the "non-interested trustees"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Trust on
behalf of the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers under the Investment Advisory Agreement was fair
and not excessive; however, the Board also recognized that uncertainty may exist
from time to time with respect to whether payments to be made by the Fund to
Advisers, Distributors, or others or by Advisers or Distributors to others may
be deemed to constitute distribution expenses. Accordingly, the Board determined
that the Plan should provide for such payments and that adoption of the Plan
would be prudent and in the best interests of the Fund and its shareholders.
Such approval included a determination that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay to Distributors or others for expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, as well as for shareholder services provided for existing shareholders of
the Fund. Distribution expenses may include, but are not limited to, the
expenses of the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares; or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. Shareholder service expenses may include, but are not limited to, the
expenses of assisting in establishing and maintaining customer accounts and
records, assisting with purchase and redemption requests, arranging for bank
wires, monitoring dividend payments from the Fund on behalf of customers,
forwarding certain shareholder communications from the Fund to customers,
receiving and answering correspondence, and aiding in maintaining the investment
of their respective customers in the Fund. These expenses may also include any
distribution or service fees paid to securities dealers or their firms or
others. Agreements for the payment of distribution and service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested trustees.
2. The maximum amount which shall be paid by the Fund to Distributors or others
pursuant to Paragraph 1 herein shall be 0.25% per annum of the average daily net
assets of the Fund. Said payment shall be made quarterly by the Fund to
Distributors or others.
3. In addition to the payments which the Fund shall make pursuant to paragraphs
1 and 2 hereof, to the extent that the Fund, Advisers, Distributors or other
parties on behalf of the Fund, Advisers or Distributors make payments that are
deemed to be payments by the Fund for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1 under the Act, then such payments shall be deemed to have been
made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested trustees, cast in person at a meeting
called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested trustees, on not more than sixty (60) days' written notice, or by
Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Investment Advisory Agreement between the Trust on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested trustees cast in
person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Trust's
non-interested trustees shall be committed to the discretion of such
non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN INVESTORS SECURITIES TRUST
on behalf of the Franklin Bond Fund
By: /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: July 16, 1998
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN INVESTORS SECURITIES
TRUST (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS,
DEBORAH R. GATZEK, KAREN L. SKIDMORE, LEIANN NUZUM, Murray L. Simpson, Barbara
J. Green and David P. Goss (with full power to each of them to act alone)
his/her attorney-in-fact and agent, in all capacities, to execute, deliver and
file in the names of the undersigned, any and all instruments that said
attorneys and agents may deem necessary or advisable to enable the Registrant to
comply with or register any security issued by the Registrant under the
Securities Act of 1933, as amended, and/or the Investment Company Act of 1940,
as amended, and the rules, regulations and interpretations thereunder, including
but not limited to, any registration statement, including any and all pre- and
post-effective amendments thereto, any other document to be filed with the U.S.
Securities and Exchange Commission and any and all documents required to be
filed with respect thereto with any other regulatory authority. Each of the
undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes, as he/she could do if personally present, thereby ratifying all
that said attorneys-in-fact and agents may lawfully do or cause to be done by
virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each
of which shall be deemed to be an original, and all of which shall be deemed to
be a single document.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 15th day of February, 2000.
/s/Edward B. Jamieson, /s/Frank H. Abbott, III,
Principal Executive Officer and Trustee Trustee
/s/Harris J. Ashton, /s/S. Joseph Fortunato,
Trustee Trustee
/s/Edith E. Holiday, /s/Charles B. Johnson,
Trustee Trustee
/s/Rupert H. Johnson, Jr., /s/Frank W.T. LaHaye,
Trustee Trustee
/s/Gordon S. Macklin, /s/Martin L. Flanagan,
Trustee Principal Financial Officer
/s/Kimberley H. Monasterio,
Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of FRANKLIN INVESTORS
SECURITIES TRUST (the "Trust").
As Assistant Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at a
meeting held at 777 Mariners Island Boulevard, San Mateo, California 94404, on
February 15, 2000.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Mark H. Plafker, Karen L. Skidmore,
Leiann Nuzum, Murray L. Simpson, Barbara J. Green and David P.
Goss as attorneys-in-fact for the purpose of filing documents
with the Securities and Exchange Commission, be executed by each
Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: February 28, 2000 /s/ David P. Goss
Assistant Secretary
POWER OF ATTORNEY
The undersigned officers and trustees of ADJUSTABLE RATE SECURITIES
PORTFOLIOS (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E.
BURNS, DEBORAH R. GATZEK, KAREN L. SKIDMORE, LEIANN NUZUM, Murray L. Simpson,
Barbara J. Green and David P. Goss (with full power to each of them to act
alone) his/her attorney-in-fact and agent, in all capacities, to execute,
deliver and file in the names of the undersigned, any and all instruments
that said attorneys and agents may deem necessary or advisable to enable the
Registrant to comply with or register any security issued by the Registrant
under the Securities Act of 1933, as amended, and/or the Investment Company
Act of 1940, as amended, and the rules, regulations and interpretations
thereunder, including but not limited to, any registration statement,
including any and all pre- and post-effective amendments thereto, any other
document to be filed with the U.S. Securities and Exchange Commission and any
and all documents required to be filed with respect thereto with any other
regulatory authority. Each of the undersigned grants to each of said
attorneys, full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes, as he/she could do
if personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more counterparts,
each of which shall be deemed to be an original, and all of which shall be
deemed to be a single document.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 15th day of February, 2000.
/s/Charles E. Johnson, /s/Frank H. Abbott, III,
Principal Executive Officer and Trustee Trustee
/s/Harris J. Ashton, /s/S. Joseph Fortunato,
Trustee Trustee
/s/Charles B. Johnson, /s/Rupert H. Johnson, Jr.,
Trustee Trustee
/s/Frank W.T. LaHaye, /s/William J. Lippman,
Trustee Trustee
/s/Gordon S. Macklin, /s/Martin L. Flanagan,
Trustee Principal Financial Officer
/s/Kimberley H. Monasterio,
Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of ADJUSTABLE RATE
SECURITIES PORTFOLIOS (the "Trust").
As Assistant Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at a
meeting held at 777 Mariners Island Boulevard, San Mateo, California 94404, on
February 15, 2000.
RESOLVED, that a Power of Attorney, substantially in the
form of the Power of Attorney presented to this Board,
appointing Harmon E. Burns, Deborah R. Gatzek, Mark H.
Plafker, Karen L. Skidmore, Leiann Nuzum, Murray L.
Simpson, Barbara J. Green and David P. Goss as
attorneys-in-fact for the purpose of filing documents with
the Securities and Exchange Commission, be executed by each
Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: February 28, 2000 /s/ David P. Goss
Assistant Secretary
