FIST2 P-3
SUPPLEMENT DATED JANUARY 1, 2001
TO THE PROSPECTUS OF
FRANKLIN INVESTOR SECURITIES TRUST
(FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES AND FRANKLIN BOND FUNDS)
DATED MARCH 1, 2000
I. All references to Franklin Templeton Trust Company in this prospectus are
replaced with Franklin Templeton Bank & Trust.
II. All references to the $5.00 exchange fee applicable to market timers are
no longer applicable.
III. The second paragraph of the "Goals and Strategies" section on page 11 is
revised with the following:
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 85% of its
assets in investment grade debt securities. The fund focuses on government and
corporate debt securities and mortgage and asset-backed securities.
IV. The sixth paragraph of the "Goals and Strategies" section on page 11 is
replaced with the following:
Asset-backed securities are securities backed by loans, leases, and other
receivables.
V. The first paragraph of the "Goals and Strategies" section on page 12 is
replaced with the following:
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 15% 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.
VI. The third paragraph of the "Goals and Strategies" section on page 12 is
replaced with the following:
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 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 and
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.
VII. The section "Minimum investments" on page 25 is replaced with the
following:
MINIMUM INVESTMENTS
--------------------------------------------------------------------------------
INITIAL ADDITIONAL
--------------------------------------------------------------------------------
Regular accounts $1,000 $50
--------------------------------------------------------------------------------
Automatic investment plans $50 ($25 for an $50 ($25 for an
Education IRA) Education IRA)
--------------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
--------------------------------------------------------------------------------
Retirement accounts
(other than IRAs, IRA rollovers, no minimum no minimum
Education IRAs or Roth IRAs)
--------------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or $250 $50
Roth IRAs)
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
Please note that you may only buy shares of a fund eligible for sale in your
state or jurisdiction.
VIII. The section "Account Application" on page 26 is replaced with the
following:
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 "Investor Services" on page 27). For example, if you would like
to link one of your bank accounts to your fund account so that you may use
electronic fund transfers to and from your bank account to buy and sell shares,
please complete the bank information section of the application. We will keep
your bank information on file for future purchases and redemptions.
IX. The following is added to the section "Buying shares" on page 26:
--------------------------------------------------------------------------------
[Insert graphic of phone] If you have another Before requesting a
Franklin Templeton fund telephone purchase,
BY PHONE account with your bank please make sure we have
account information on your bank account
(Up to $100,000 per day) file, you may open a new information on file. If
account by phone. we do not have this
1-800/632-2301 information, you will
To make a same day need to send written
investment, please call instructions with your
us by 1:00 p.m. Pacific bank's name and address,
time or the close of the a voided check or
New York Stock Exchange, savings account deposit
whichever is earlier. slip, and a signature
guarantee if the bank
and fund accounts do not
have at least one common
owner.
To make a same day
investment, please call
us by 1:00 p.m. Pacific
time or the close of the
New York Stock Exchange,
whichever is earlier.
--------------------------------------------------------------------------------
X. The section "Automatic Investment Plan" on page 27 is replaced with the
following:
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 and mail it to Investor Services.
If you are opening a new account, please include the minimum initial investment
of $50 ($25 for an Education IRA) with your application.
XI. The section "Telephone Privileges" on page 28 is replaced with the
following:
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to buy,
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. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one signature
for all transactions. This type of telephone exchange is available as long as
you have telephone exchange privileges on your account.
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 purchase, exchange or redemption privileges on your
account application.
XII. The last paragraph of the "Exchange Privilege" section on page 28 is
replaced with the following:
Because excessive trading can hurt fund performance, operations and
shareholders, each fund, effective November 1, 2000, reserves the right to
revise or terminate the exchange privilege, limit the amount or number of
exchanges, reject any exchange, or restrict or refuse purchases if (i) the fund
or its manager believes the fund would be harmed or unable to invest
effectively, or (ii) the fund receives or anticipates simultaneous orders that
may significantly affect the fund (please see "Market Timers" on page 33).
XIII. In the Selling Shares table on page 31 the section "By Electronic Funds
Transfer (ACH)" is replaced with the following:
--------------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption proceeds sent to
three lightning bolts] a bank account. See the policies above for selling shares
by mail or phone.
BY ELECTRONIC
FUNDS TRANSFER (AHC)
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
bank and fund accounts do not have at least one common
owner.
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.
--------------------------------------------------------------------------------
XIV. The section "Market Timers" on page 33 is replaced with the following:
MARKET TIMERS Each fund may restrict or refuse purchases or exchanges by Market
Timers. You may be considered a Market Timer if you have (i) requested an
exchange out of any of the Franklin Templeton funds within two weeks of an
earlier exchange request out of any fund, or (ii) exchanged shares out of any of
the Franklin Templeton funds more than twice within a rolling 90 day period, or
(iii) otherwise seem to follow a market timing pattern that may adversely affect
the fund. Accounts under common ownership or control with an account that is
covered by (i), (ii), or (iii) are also subject to these limits.
Anyone, including the shareholder or the shareholder's agent, who is considered
to be a Market Timer by the fund, its manager or shareholder services agent,
will be issued a written notice of their status and the fund's policies.
Identified Market Timers will be required to register with the market timing
desk of Franklin Templeton Investor Services, Inc., and to place all purchase
and exchange trade requests through the desk. Some funds do not allow
investments by Market Timers.
XV. The first category in the section "Additional Policies" on page 33 is
revised to read:
o The funds may restrict or refuse any order to buy shares, including any
purchase under the exchange privilege.
XVI. The following paragraph is added to the section "Dealer Compensation" on
page 34:
MARKET TIMERS. Please note that for NAV purchases by market timers, including
purchases of $1 million or more, dealers are not eligible to receive the dealer
commission. Dealers, however, may be eligible to receive the 12b-1 fee from the
date of purchase.
Please keep this supplement for future reference.
FIST2 PA-3
SUPPLEMENT DATED JANUARY 1, 2001
TO THE PROSPECTUS OF
FRANKLIN BOND FUND - ADVISOR CLASS
DATED MARCH 1, 2000
The prospectus is amended as follows:
I. All references to Franklin Templeton Trust Company in this prospectus are
replaced with Franklin Templeton Bank & Trust.
II. All references to the $5.00 exchange fee applicable to market timers are
no longer applicable.
III. The second paragraph of the section "Goals and Strategies" on page 2 is
revised with the following:
PRINCIPAL INVESTMENT STRATEGIES The fund normally invests at least 85% of its
assets in investment grade debt securities. The fund focuses on government and
corporate debt securities and mortgage and asset-backed securities.
IV. The sixth paragraph of the section "Goals and Strategies" on page 2 is
replaced with the following:
Asset-backed securities are securities backed by loans, leases, and other
receivables.
V. The first paragraph of the section "Goals and Strategies" on page 3 is
replaced with the following:
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 15% 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.
VI. The third paragraph of the section "Goals and Strategies" on page 3 is
replaced with the following:
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 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 and
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.
VII. The section "Account Application" on page 14 is replaced with the
following:
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 "Investor Services" on page 15). For example, if you would like
to link one of your bank accounts to your fund account so that you may use
electronic fund transfers to and from your bank account to buy and sell shares,
please complete the bank information section of the application. We will keep
your bank information on file for future purchases and redemptions.
VIII. The following is added to the section "Buying shares" on page 14:
--------------------------------------------------------------------------------
[INSERT GRAPHIC OF PHONE] If you have another Before requesting a
Franklin Templeton telephone purchase,
BY PHONE account with your bank please make sure we have
account information on your bank account
(Up to $100,000 per day) file, you may open a new information on file. If
account by phone. we do not have this
1-800/632-2301 information, you will
To make a same day need to send written
investment, please call instructions with your
us by 1:00 p.m. Pacific bank's name and address,
time or the close of the a voided check or
New York Stock Exchange, savings account deposit
whichever is earlier. slip, and a signature
guarantee if the
ownership of the bank
and fund accounts do not
have at least one common
owner.
To make a same day
investment, please call
us by 1:00 p.m. Pacific
time or the close of the
New York Stock Exchange,
whichever is earlier.
--------------------------------------------------------------------------------
IX. The section "Automatic Investment Plan" on page 15 is replaced with the
following:
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 and mail it to Investor Services. If you are opening
a new account, please include your minimum initial investment with your
application.
X. The following section is added to "Investor Services" on page 15:
AUTOMATIC PAYROLL DEDUCTION You may invest in the fund automatically 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.
XI. The section "Telephone Privileges" on page 15 is replaced with the
following:
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to buy,
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. In addition, our telephone exchange privilege allows you to
exchange shares by phone from a fund account requiring two or more signatures
into an identically registered money fund account requiring only one signature
for all transactions. This type of telephone exchange is available as long as
you have telephone exchange privileges on your account.
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 purchase, exchange or redemption privileges on your
account application.
XII. The last paragraph of the "Exchange Privilege" section on page 16 is
replaced with the following:
Because excessive trading can hurt fund performance, operations and
shareholders, the fund, effective November 1, 2000, reserves the right to revise
or terminate the exchange privilege, limit the amount or number of exchanges,
reject any exchange, or restrict or refuse purchases if (i) the fund or its
manager believes the fund would be harmed or unable to invest effectively, or
(ii) the fund receives or anticipates simultaneous orders that may significantly
affect the fund (please see "Market Timers" on page 20).
XIII. In the Selling Shares table on page 18 the section "By Electronic Funds
Transfer (ACH)" is replaced with the following:
--------------------------------------------------------------------------------
[INSERT GRAPHIC OF THREE You can call or write to have redemption proceeds sent
LIGHTNING BOLTS] to a bank account. See the policies above for selling
shares by mail or phone.
BY ELECTRONIC FUNDS
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 bank and fund accounts do
not have at least one common owner.
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.
--------------------------------------------------------------------------------
XIV. The section "Market Timers" on page 20 is replaced with the following:
MARKET TIMERS The fund may restrict or refuse purchases or exchanges by Market
Timers. You may be considered a Market Timer if you have (i) requested an
exchange out of any of the Franklin Templeton funds within two weeks of an
earlier exchange request out of any fund, or (ii) exchanged shares out of any of
the Franklin Templeton funds more than twice within a rolling 90 day period, or
(iii) otherwise seem to follow a market timing pattern that may adversely affect
the fund. Accounts under common ownership or control with an account that is
covered by (i), (ii), or (iii) are also subject to these limits.
Anyone, including the shareholder or the shareholder's agent, who is considered
to be a Market Timer by the fund, its manager or shareholder services agent,
will be issued a written notice of their status and the fund's policies.
Identified Market Timers will be required to register with the market timing
desk of Franklin Templeton Investor Services, Inc., and to place all purchase
and exchange trade requests through the desk. Some funds do not allow
investments by Market Timers.
XV. The first category in the section "Additional Policies" on page 20 is
revised to read:
o The fund may restrict or refuse any order to buy shares, including any
purchase under the exchange privilege.
Please keep this supplement for future reference.
FIST2 SA-2
SUPPLEMENT DATED JANUARY 1, 2001
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN INVESTORS SECURITIES TRUST
(FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AND FRANKLIN BOND FUND)
DATED MARCH 1, 2000
The Statement of Additional Information (SAI) is amended as follows:
I. The fifth paragraph of the section "Goals, Strategies and Risks" on page
2, is revised with the following:
The fund tries to achieve its investment goals by investing at least 85% of its
total assets in investment grade debt securities, including government and
corporate debt securities and mortgage-backed and asset-backed securities. Up to
15% of the fund's total assets may be invested in non-investment grade debt
securities.
II. The following is added after the eighth paragraph of the section "Goals,
Strategies and Risks" on page 2:
INTEREST RATE AND CURRENCY SWAPS The Bond fund may invest in interest rate and
currency 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 (e.g., LIBOR, prime, commercial paper, or
other benchmarks). The obligations to make repayment of principal on the
underlying securities are not exchanged. These transactions generally require
the participation of an intermediary, frequently a bank. The entity holding the
fixed-rate obligation will transfer the obligation to the intermediary, and that
entity will then be obligated to pay to the intermediary a floating rate of
interest, generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity that
has a floating-rate obligation which substantially mirrors the obligation
desired by the first party. In return for assuming a fixed obligation, the
second entity will pay the intermediary all sums that the intermediary pays on
behalf of the first entity, plus an arrangement fee and other agreed upon fees.
Interest rate swaps are generally entered into to permit the party seeking a
floating rate obligation the opportunity to acquire such obligation at a lower
rate than is directly available in the credit market, while permitting the party
desiring a fixed-rate obligation the opportunity to acquire such a fixed-rate
obligation, also frequently at a price lower than is available in the credit
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.
The fund will only enter into interest rate swaps on a net basis, which means
that the two payment streams are netted out, with the fund receiving or paying,
as the case may be, only the net amount of the two payments. Interest rate swaps
do not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the fund's risk of
loss consists of the net amount of interest payments that the fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.
III. The last paragraph on page 7 of the "Goals and Strategies" section, is
replaced with the following:
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.
IV. All references to Franklin Templeton Trust Company in this SAI are
replaced with Franklin Templeton Bank & Trust.
V. The first waiver category in the section "Waivers for certain investors"
on page 31 is revised to read:
o Trust companies and bank trust departments investing 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 may accept orders for these accounts 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.
VI. The eighth waiver category in the "CDSC waivers" on page 33 is revised to
read:
o Redemptions by an employee benefit plan: (i) that is a customer of Franklin
Templeton Defined Contribution Services; and/or (ii) whose assets are held by
Franklin Templeton Bank & Trust as trustee or custodian
VII. The section "Systematic withdrawal plan" on page 33 is replaced with the
following:
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.
Each month in which a payment is scheduled, we will redeem an equivalent amount
of shares in your account on the day of the month you have indicated on your
account application or, if no day is indicated, on the 20th day of the month. If
that day falls on a weekend or holiday, we will process the redemption on the
next business day. For plans set up before June 1, 2000, we will continue to
process redemptions on the 25th day of the month (or the next business day)
unless you instruct us to change the processing date. Available processing dates
currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. 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 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.
To discontinue a systematic withdrawal plan, change the amount and schedule of
withdrawal payments, or suspend one payment, we must receive instructions from
you at least three business days before a scheduled payment. The fund may
discontinue a systematic withdrawal plan by notifying you in writing and will
discontinue a systematic withdrawal plan automatically if all shares in your
account are withdrawn or if the fund receives notification of the shareholder's
death or incapacity.
VIII. The following paragraph is added to the section "General information"
on page 34:
There are special procedures for banks and other institutions that wish to open
multiple accounts. An institution may open a single master account by filing one
application form with the fund, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened when the master account is
opened by listing them on the application, or by providing instructions to the
fund at a later date. These sub-accounts may be registered either by name or
number. The fund's investment minimums apply to each sub-account. The fund will
send confirmation and account statements for the sub-accounts to the
institution.
IX. The following paragraph is added to the section "Comparisons" on page 39.
o Lehman Brothers U.S. Universal Index is a composite index consisting of the
Lehman U.S. Aggregate Index, the 144A Index, Non-ERISA CMBS Index, High Yield
CMBS Index, U.S. High Yield Corporate Index and the dollar-denominated Emerging
Markets Index.
PLEASE KEEP THIS SUPPLEMENT FOR FUTURE REFERENCE.
FIST2 SAA-2
SUPPLEMENT DATED JANUARY 1, 2001
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN BOND FUND - ADVISOR CLASS
DATED MARCH 1, 2000
The Statement of Additional Information (SAI) is amended as follows:
I. The second paragraph of the section "Goals, Strategies and Risks" on page
2, is revised with the following:
The fund tries to achieve its investment goals by investing at least 85% of its
total assets in investment grade debt securities, including government and
corporate debt securities and mortgage-backed and asset-backed securities. Up to
15% of the fund's total assets may be invested in non-investment grade debt
securities.
II. The following is added after the fifth paragraph of the section "Goals,
Strategies and Risks" on page 2:
INTEREST RATE AND CURRENCY SWAPS The Bond fund may invest in interest rate and
currency 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 (e.g., LIBOR, prime, commercial paper, or
other benchmarks). The obligations to make repayment of principal on the
underlying securities are not exchanged. These transactions generally require
the participation of an intermediary, frequently a bank. The entity holding the
fixed-rate obligation will transfer the obligation to the intermediary, and that
entity will then be obligated to pay to the intermediary a floating rate of
interest, generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity that
has a floating-rate obligation which substantially mirrors the obligation
desired by the first party. In return for assuming a fixed obligation, the
second entity will pay the intermediary all sums that the intermediary pays on
behalf of the first entity, plus an arrangement fee and other agreed upon fees.
Interest rate swaps are generally entered into to permit the party seeking a
floating rate obligation the opportunity to acquire such obligation at a lower
rate than is directly available in the credit market, while permitting the party
desiring a fixed-rate obligation the opportunity to acquire such a fixed-rate
obligation, also frequently at a price lower than is available in the credit
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.
The fund will only enter into interest rate swaps on a net basis, which means
that the two payment streams are netted out, with the fund receiving or paying,
as the case may be, only the net amount of the two payments. Interest rate swaps
do not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the fund's risk of
loss consists of the net amount of interest payments that the fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.
III. The fifth paragraph of the "Goals and Strategies" section, on page 7 is
replaced with the following:
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.
IV. The section "Systematic withdrawal plan" on page 25 is replaced with the
following:
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.
Each month in which a payment is scheduled, we will redeem an equivalent amount
of shares in your account on the day of the month you have indicated on your
account application or, if no day is indicated, on the 20th day of the month. If
that day falls on a weekend or holiday, we will process the redemption on the
next business day. For plans set up before June 1, 2000, we will continue to
process redemptions on the 25th day of the month (or the next business day)
unless you instruct us to change the processing date. Available processing dates
currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. 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.
To discontinue a systematic withdrawal plan, change the amount and schedule of
withdrawal payments, or suspend one payment, we must receive instructions from
you at least three business days before a scheduled payment. The fund may
discontinue a systematic withdrawal plan by notifying you in writing and will
discontinue a systematic withdrawal plan automatically if all shares in your
account are withdrawn or if the fund receives notification of the shareholder's
death or incapacity.
V. The following paragraph is added to the section "General information" on
page 26:
There are special procedures for banks and other institutions that wish to open
multiple accounts. An institution may open a single master account by filing one
application form with the fund, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened when the master account is
opened by listing them on the application, or by providing instructions to the
fund at a later date. These sub-accounts may be registered either by name or
number. The fund's investment minimums apply to each sub-account. The fund will
send confirmation and account statements for the sub-accounts to the
institution.
VI. The following paragraph is added to the section "Comparisons" on page 29.
o Lehman Brothers U.S. Universal Index is a composite index consisting of the
Lehman U.S. Aggregate Index, the 144A Index, Non-ERISA CMBS Index, High Yield
CMBS Index, U.S. High Yield Corporate Index and the dollar-denominated Emerging
Markets Index.
PLEASE KEEP THIS SUPPLEMENT FOR FUTURE REFERENCE.
