FRANKLIN STRATEGIC
INCOME FUND
FRANKLIN STRATEGIC SERIES
PROSPECTUS September 1, 1995
as amended December 19, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Strategic Income Fund (the "Fund") is a non-diversified series of
Franklin Strategic Series (the "Trust"), an open-end management investment
company. The Fund's primary investment objective is to obtain a high level of
current income, with capital appreciation over the long term as a secondary
objective. The Fund seeks to achieve its objectives by using an active asset
allocation process and a flexible policy of investing in: securities of the
United States ("U.S.") and foreign governments, their agencies, authorities and
instrumentalities; U.S. and foreign corporate high yield fixed-income
securities; various types of fixed or adjustable rate mortgage securities;
asset-backed securities; common stocks which pay dividends; preferred stocks;
and income producing securities which are convertible into common stocks.
The Fund may invest up to 100% of its portfolio in non-investment grade bonds
issued by both U.S. and foreign issuers, commonly known as "junk bonds," which
entail default and other risks greater than those associated with higher rated
securities. Investors should carefully assess the risks associated with an
investment in the Fund in light of the securities in which the Fund invests. See
"Risk Considerations - High Yielding, Fixed-Income Securities" and "Risk
Considerations - Foreign Securities."
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Fund involve investment risks, including the possible loss of
principal.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
A Statement of Additional Information ("SAI") concerning the Fund, dated
September 1, 1995, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this Prospectus. Further
information may be obtained from the underwriter.
Contents Page
Expense Table 2
Financial Highlights............. 4
About the Fund................... 4
Investment Objectives and Policies
of the Fund..................... 4
Risk Considerations.............. 14
Management of the Fund........... 20
Distributions to Shareholders.... 21
Taxation of the Fund and
Its Shareholders................ 22
How to Buy Shares of the Fund.... 23
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments 29
Other Programs and Privileges
Available to Fund Shareholders.. 30
Exchange Privilege............... 32
How to Sell Shares of the Fund... 34
Telephone Transactions........... 38
Valuation of Fund Shares......... 39
How to Get Information Regarding
an Investment in the Fund....... 40
Performance...................... 41
General Information.............. 42
Account Registrations............ 43
Important Notice Regarding
Taxpayer IRS Certifications..... 44
Portfolio Operations............. 44
Appendix......................... 45
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
annualized operating expenses of the Fund, before fee waivers and expense
reductions, for the period May 24, 1994 (effective date of registration) to
April 30, 1995.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).............................. 4.25%
Deferred Sales Charge............................................. NONE*
Exchange Fee (per transaction).................................... $5.00**
Annual Fund Operating Expenses+
(as a percentage of average net assets)
Management Fees................................................... 0.63%***
12b-1 Fees........................................................ 0.02%++
Other Expenses:
Reports to Shareholders................................... 0.33%
Professional Fees........................................... 0.23%
Other....................................................... 0.17%
Total Other Expenses.............................................. 0.73%
Total Fund Operating Expenses..................................... 1.38%***
*Investments of $1 million or more are not subject to a front-end sales charge;
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
**$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
***Represents the management fee before any fee waiver by the investment
manager. The investment manager has agreed in advance, however, to waive its
management fees and to make certain payments to reduce expenses. With this
waiver and expense reduction, the Fund paid no management fees and total
operating expenses represented 0.25% of the average net assets of the Fund.
+Annualized.
++The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.25%. See "Plan of Distribution" under "Management of the
Fund." Consistent with National Association of Securities Dealers, Inc.'s rules,
it is possible that the combination of front-end sales charges and Rule 12b-1
fees could cause long-term shareholders to pay more than the economic equivalent
of the maximum front-end sales charges permitted under those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period:
One Year Three Years Five Years Ten Years
$56* $84 $115 $201
*Assumes that a contingent deferred sales charge will not apply.
This example is based on the aggregate annualized operating expenses, before fee
waivers and expense reductions, shown above and should not be considered a
representation of past or future expenses, which may be more or less than those
shown. The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. In addition, federal
securities regulations require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%.
Financial Highlights
Set forth below is a table containing the financial highlights for a share of
the Fund for the period May 24, 1994 (effective date of registration) to April
30, 1995. The information has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Trust's Annual Report to Shareholders dated April 30, 1995. See the
discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------
Ratio
Net Net Total Distri- Distri- Net Net Ratio of of Net
Asset Net Realized & From butions bution Asset Assets Expenses Investment
Period Value at Invest- Unrealized Invest- From Net from Total Value at End to Average Income to Portfolio
Ended Beginning ment Gains on ment Investment Capital Distri- at End Total of Year Net Average Turnover
April 30of Year Income SecuritiesOperations Income Gains butions of Year Return** (in 000's) Assets Net Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995* $10.00 $0.70 $0.154 $0.854 (0.674) - (0.674) $10.18 8.94% $6,736 0.25%*** 7.93% 68.43%
</TABLE>
*For the period May 24, 1994 (effective date) to April 30, 1995.
**Total return measures the change in value of an investment over the period
indicated. It is not annualized. It does not include the maximum front-end sales
charge and assumes reinvestment of dividends and capital gains, if any, at net
asset value.
***During the period indicated, the investment manager agreed to waive in
advance its management fees and made payments of other expenses incurred by the
Fund. Had such action not been taken, the ratio of operating expenses to average
net assets would have been 1.38%+.
+Annualized.
About the Fund
The Trust is an open-end management investment company, commonly called a
"mutual fund." The Trust was organized as a Delaware business trust in January
1991 and registered with the SEC under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust currently consists of eight series, each of
which issues a separate series of the Trust's shares and maintains a totally
separate investment portfolio. This Prospectus relates only to the Franklin
Strategic Income Fund, a non-diversified series of the Trust.
The Board of Trustees may determine, at a future date, to offer shares of the
Fund in one or more "classes" to permit the Fund to take advantage of
alternative methods of selling Fund shares. "Classes" of shares represent
proportionate interests in the same portfolio of investment securities but with
different rights, privileges and attributes, as determined by the trustees.
Certain funds in the Franklin Templeton Funds, as that term is defined under
"How to Buy Shares of the Fund," currently offer their shares in two classes,
designated "Class I" and "Class II." Because the Fund's sales charge structure
and plan of distribution are similar to those of Class I shares, shares of the
Fund may be considered Class I shares for redemption, exchange and other
purposes.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price, which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge not
exceeding 4.25% of the offering price. See "How to Buy Shares of the Fund."
Investment Objectives
and Policies of the Fund
The Fund's primary investment objective is to obtain a high level of current
income, with capital appreciation over the long term as a secondary objective.
The Fund will seek to achieve these objectives by using an active asset
allocation process and a flexible policy of investing in securities of U.S. and
foreign governments, their agencies, authorities and instrumentalities; U.S. and
foreign corporate high yield fixed-income securities; various types of fixed or
adjustable rate mortgage securities; asset-backed securities; common stocks
which pay dividends; preferred stocks; and income producing securities which are
convertible into common stocks, generally with particular consideration to
current income but which may also be purchased for long-term capital
appreciation. The investment objectives are fundamental policies of the Fund and
may not be changed without shareholder approval. The policies used to achieve
these objectives are not fundamental policies and are subject to change without
shareholder approval. Because of the Fund's ability to invest in lower rated
U.S. and foreign corporate bonds, an investment in the Fund is subject to a
higher degree of risk than an investment in a more conservative type of income
fund. As with any other investment, there is no assurance that the Fund's
objectives will be achieved.
Under normal circumstances, at least 65% of the Fund's assets will be invested
in U.S. and foreign debt securities which include bonds, notes, mortgage-backed
securities and asset-backed securities, U.S. and foreign corporate high yield
securities, convertible securities, and preferred stock. The Fund may invest the
remainder of its assets, up to 35%, in common stocks, generally with particular
consideration to current income but which may also be purchased for potential
long-term capital appreciation. There are no restrictions, other than as set
forth above, as to the proportion of the Fund's assets which may be invested in
a particular type of security and such determination is entirely within the
investment manager's discretion.
The Fund will use an active asset allocation strategy in order to maximize both
income and capital appreciation, which means that the Fund will allocate its
assets among securities in various market sectors in anticipation of, and in
response to, varying economic, market, industry and issuer conditions. The
investment manager will use a two-sided analysis to take advantage of varying
sector reactions to economic events. The investment manager will use a
"top-down" macroeconomic analysis combined with a "bottom-up" fundamental
sector, industry and issuer analysis. Country risk, business cycles, yield
curves and values between and within markets will be evaluated.
Types of Securities the Fund May Purchase
High Yield Corporate Securities. The Fund may invest in securities rated in any
category by Standard & Poor's Corporation ("S&P") or Moody's Investors Service,
Inc. ("Moody's"), two nationally recognized statistical rating organizations
("NRSROs"), including, without limitation, lower rated, fixed-income U.S. and
foreign corporate high yield securities and unrated securities of comparable
quality, commonly called "junk bonds." See "Risk Considerations - High Yielding,
Fixed-Income Securities" and "Risk Considerations - Foreign Securities." As an
operating policy, the Fund will generally invest in securities that are rated at
least Caa by Moody's or CCC by S&P, or in unrated securities of comparable
quality as determined by the investment manager. While unrated debt securities
are not necessarily of lower quality, they may not be as attractive of an
investment as rated securities to many buyers. (See "Appendix" for a description
of the ratings assigned by Moody's and S&P.) Regardless of ratings, all debt
securities considered for purchase (whether rated or unrated) will be carefully
analyzed by the investment manager to insure, to the extent possible, that the
planned investment is consistent with the Fund's investment objectives.
Foreign Securities. The Fund may invest in foreign government and corporate debt
securities and in American Depositary Receipts ("ADRs"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. The Fund's investment
in ADRs may be sponsored and unsponsored. Further information about ADRs is
included in the SAI. The Fund may purchase foreign securities which are traded
in the U.S. and may purchase the securities of foreign issuers directly in
foreign markets. The Fund may also purchase securities of U.S. issuers which are
denominated in a foreign currency. See "Risk Considerations - Foreign
Securities."
Government Securities. The Fund may invest in Treasury bills and bonds, which
are obligations of, or guaranteed by, the U.S. government and are supported by
the full faith and credit of the U.S. Treasury. The Fund may also invest in U.S.
government agency securities, which are obligations of, or guaranteed by, U.S.
government agencies or instrumentalities, such as Federal Home Loan Banks, and
are supported by the right of the issuer to borrow from the Treasury. Securities
of other agencies, such as those issued or guaranteed by the Federal National
Mortgage Association, which are supported only by the credit of the
instrumentality, may also be purchased by the Fund. See the discussion of
mortgage securities below.
Mortgage Securities - General Characteristics. The Fund may invest in mortgage
securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), adjustable rate mortgage securities
("ARMs"), collateralized mortgage obligations ("CMOs"), and stripped
mortgage-backed securities, any of which may be privately issued. The Fund may
also invest in asset-backed securities. Please see the discussion below for a
description of the types of municipal or asset-backed securities in which the
Fund may invest.
A mortgage security is an interest in a pool of mortgage loans. The primary
issuers or guarantors of mortgage securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage securities from pools of government guaranteed or insured
(Federal Housing Authority or Veterans Administration) mortgages originated by
mortgage bankers, commercial banks, and savings and loan associations. FNMA and
FHLMC issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions, and mortgage bankers. The principal and interest on GNMA securities are
guaranteed by GNMA and 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. Notwithstanding the foregoing, because
FNMA and FHLMC are instrumentalities of the U.S. government, these securities
are generally considered to be high quality investments having minimal credit
risks.
Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments consisting of a pro rata share of both
regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool. The Fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities. CMOs and
stripped mortgage securities are not pass-through securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage securities nor do they extend to the value of the
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 interest rates
of ARMs move with market interest rates, and thus their value tends to fluctuate
to a lesser degree. In view of such factors, the ability of the Fund to obtain a
high level of total return may be limited under varying market conditions.
Adjustable Rate Mortgage Securities. ARMs, like traditional mortgage securities,
are an interest in a pool of mortgage loans and are issued or guaranteed by a
federal agency or by private issuers. Unlike fixed-rate mortgages, which
generally decline in value during periods of rising interest rates, the interest
rates on the mortgages underlying ARMs are reset periodically and thus allow the
Fund to participate in increases in interest rates, resulting in both higher
current yields and lower price fluctuations. The rate of amortization of
principal, as well as interest payments, for certain types of ARMs change in
accordance with movements in a pre-specified, published interest rate index.
There are several categories of indices, including those based on U.S. Treasury
securities, those derived from a calculated measure, such as a cost of funds
index, or a moving average of mortgage rates and actual market rates. The amount
of interest due to an ARM security holder is calculated by adding a specified
additional amount, the "margin," to the index, subject to limitations or "caps"
on the maximum and minimum interest that is charged to the mortgagor during the
life of the mortgage or to maximum and minimum changes to that interest rate
during a given period. The interest rates paid on the ARMs in which the Fund may
invest are generally readjusted at intervals of one year or less, although
instruments with longer resets such as three years and five years are also
permissible investments.
The underlying mortgages which 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 such
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
Stripped Mortgage-Backed Securities. The Fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available from
fixed-rate mortgage securities. The stripped mortgage 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 securities. Stripped
mortgage-backed securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity of an IO and PO class is
extremely sensitive not only to changes in prevailing interest rates but also to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the Fund invests and are purchased and
sold by institutional investors, such as the Fund, through several investment
banking firms acting as brokers or dealers. As these securities were only
recently developed, traditional trading markets have not yet been established
for all such securities. Accordingly, some of these securities may generally be
illiquid. The staff of the SEC has indicated that only government-issued IO or
PO securities which are backed by fixed-rate mortgages may be deemed liquid, if
procedures with respect to determining liquidity are established by a Fund's
board. The Board of Trustees may, in the future, adopt procedures which 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 continue
to be treated as illiquid and will, together with any other illiquid
investments, not exceed 10% of the Fund's net assets. Such position may be
changed in the future, without notice to shareholders, in response to the SEC
staff's continued reassessment of this matter, as well as to changing market
conditions.
Collateralized Mortgage Obligations. CMOs are fixed-income securities which are
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other issuers in the U.S. Timely payment of interest and principal (but not
the market value) 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. The Fund may buy CMOs
which are rated in any category by the NRSROs without insurance or guarantee if,
in the opinion of the investment manager, the sponsor is creditworthy.
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 such circumstances, the reinvestment of
prepayments will generally be at a rate lower than the rate applicable to the
original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specified
coupon rate or adjustable rate and has a stated maturity or final distribution
date. Principal prepayments on collateral underlying a CMO, however, may cause
it to be retired substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of a CMO on a
monthly, quarterly or semiannual basis. The principal and interest on the
underlying mortgages may be allocated among several classes of a series in many
ways. In a common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the classes of a series
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
To the extent any privately issued CMOs in which the Fund invests are considered
by the SEC to be an investment company, the Fund will limit its investments in
such securities in a manner consistent with the provisions of the 1940 Act.
Asset-Backed Securities. The Fund may invest in various asset-backed securities
rated in any category by an NRSRO. The underlying assets may include, but are
not limited to, receivables on home equity and credit card loans, and
automobile, mobile home and recreational vehicle loans and leases. There may be
other types of asset-backed securities that are developed in the future in which
the Fund may invest. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans and historically have
been less likely to experience substantial prepayment.
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.
Options on Securities, Indices and Futures Contracts. The Fund may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities, securities indices or futures contracts that are traded on U. S. or
foreign exchanges or in the over-the-counter markets. An option on a security or
futures contract is a contract that grants the purchaser of the option, in
return for the premium paid, the right to buy a specified security or futures
contract (in the case of a call option) or to sell a specified security or
futures contract (in the case of a put option) from or to the writer of the
option at a designated price during the term of the option. An option on a
securities index grants the purchaser of the option, in return for the premium
paid, the right to receive from the seller cash equal to the difference between
the closing price of the index and the exercise price of the option. The Fund
may write a call or put option only if the option is "covered." This means that
so long as the Fund is obligated as the writer of a call option, it will own the
underlying securities or futures contracts subject to the call, or hold a call
at the same or lower exercise price, for the same exercise period, and on the
same securities or futures contracts as the written call. A put is covered if
the Fund maintains liquid assets with a value equal to the exercise price in a
segregated account, or holds a put on the same underlying securities or futures
contracts at an equal or greater exercise price. The Fund will not engage in any
stock options or stock index options if the option premiums paid on its open
option positions exceed 5% of the value of the Fund's total assets.
Options on Foreign Currencies. The Fund may purchase and write put and call
options on foreign currencies traded on U.S. and foreign exchanges or in the
over-the-counter markets. The Fund will purchase and write such options 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.
Forward Currency Exchange Contracts. The Fund may enter into forward currency
exchange contracts to attempt to minimize the risk to the Fund from adverse
changes in the relationship between currencies or to enhance income. A forward
currency exchange contract is an obligation to purchase 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.
Futures Contracts. For hedging purposes only, the Fund may buy and sell
financial futures contracts, stock and bond index futures contracts and foreign
currency futures contracts. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date. The Fund may not commit more than 5% of its total
assets to initial margin deposits on futures contracts. See "The Fund's
Investment Objectives and Policies - Futures Contracts" in the SAI.
The Fund's investment in options, forward currency exchange contracts and
futures contracts, as described above, may be limited by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for qualification as a
regulated investment company and is subject to special tax rules that may affect
the amount, timing and character of distributions to shareholders. These
securities require the application of complex and special tax rules and
elections, a discussion of which is included in the SAI.
Inverse Floaters. The Fund may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite direction, usually at an accelerated speed, to
short-term interest rates or interest rate indices.
Convertible Securities. The Fund may invest in convertible securities which
include preferred stock, bonds or debentures, stock purchase warrants and other
fixed-income securities which may be exchanged or converted into a prescribed
number of shares of the issuer's underlying common stock at a specific price
during a specified time period.
Until they mature or are converted or exchanged, convertible securities retain
investment characteristics similar to those of nonconvertible fixed-income
securities. Thus, the interest income and dividends from convertible bonds and
preferred stocks will generally provide a fixed stream of income with generally
higher yields than common stocks, but lower than nonconvertible securities of
similar quality. Such convertible bonds and preferred stocks are generally
senior securities and, therefore, have a claim to assets of the corporation
prior to the holders of common stock in the case of liquidation. Convertible
securities, however, are generally subordinate in their claim on assets to
similar nonconvertible securities of the same company.
Since the Fund's portfolio may at any time consist of convertible and other
fixed-income securities, changes in the level of interest rates, among other
things, will likely affect the market value of the Fund's holdings and thus the
value of a shareholder's investment. As the level of interest rates increases,
the market value of convertible securities may decline and, conversely, as
interest rates decline, the market value of convertible securities may increase.
The unique investment characteristic of convertible securities, i.e., the right
to be exchanged for the issuer's common stock, generally causes the market value
of convertible securities to increase when the market value of the underlying
common stock increases. Since securities prices fluctuate, however, there can be
no assurance of capital appreciation and most convertible securities will not
reflect the same level of capital appreciation as their underlying common
stocks. When the underlying common stock is experiencing a decline, the value of
the convertible security tends to decline to a level approximating the
yield-to-maturity basis of straight nonconvertible debt of similar quality,
often called "investment value," and may not experience the same decline as the
underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a
fixed-income security with a possibility of capital appreciation due to the
conversion privilege. If this appreciation potential is not realized, the
premium may not be recovered. Such securities tend to have a lesser income
element than other convertibles which trade closer to their investment value.
Other Strategies
When Issued and Delayed Delivery Transactions. The Fund may purchase U.S.
government obligations on a "when issued" or "delayed delivery" basis. These
transactions are arrangements under which the Fund purchases securities which
have been authorized but not yet issued with payment for and delivery of the
security scheduled for a future time, generally in 30 to 60 days. Purchases of
U.S. government securities on a when issued or delayed delivery basis are
subject to the risk that the value or yields at delivery may be more or less
than the purchase price or the yields available when the transaction was entered
into. Although the Fund will generally purchase U.S. government securities on a
when issued basis with the intention of holding such securities, it may sell
such securities before the settlement date if it is deemed advisable. When the
Fund is the buyer in such a transaction, it will maintain, in a segregated
account with its custodian, cash or high-grade marketable securities having an
aggregate value equal to the amount of the Fund's purchase commitments until
payment is made. To the extent the Fund engages in when issued and delayed
delivery transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with the Fund's investment objectives and policies, and
not for the purpose of investment leverage. In when issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the Fund to miss a price or yield considered
advantageous. Securities purchased on a when issued or delayed delivery basis do
not generally earn interest until their scheduled delivery date. Entering into a
when issued or delayed delivery transaction is a form of leverage that may
exacerbate changes in net asset value per share.
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.
Interest Rate and Currency Swaps. Interest rate swaps involve an exchange
between the Fund and another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Currency swaps involve the exchange of the parties' respective rights
to make or receive payments in specified currencies. Since interest rate and
currency swaps are individually negotiated, the Fund expects to achieve an
acceptable degree of correlation between its portfolio investments and its
interest rate or currency swap positions.
The use of interest rate and currency swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the investment manager is
incorrect in its forecasts of market values, interest rates and currency
exchange rates, the investment performance of the Fund would be less favorable
than it would have been if this investment technique were not used.
Loan Participations and Defaulted Debt Securities. Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. While loan participations generally trade at
par value, the Fund will acquire those 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. The investment manager
may acquire loan participations for the Fund when it believes, over the long
term, appreciation will occur. An investment in such securities, however,
carries substantially the same risks associated with an investment in defaulted
debt securities and may result in the loss of the Fund's entire investment. The
Fund will purchase defaulted debt securities if, in the opinion of the
investment manager, it appears the issuer may resume interest payments or other
advantageous developments appear likely in the near future. Loan participations
and defaulted debt securities may be considered illiquid and, if so, will be
included in the 10% limitation discussed under "Illiquid Investments." See also
"Risk Considerations - High Yielding, Fixed-Income Securities."
Loans of Portfolio Securities. Consistent with procedures approved by the Board
of Trustees and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 331/3% of the value of the
Fund's total assets at the time of the most recent loan. It is the Fund's
current intention, however, not to exceed 10% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian collateral with an initial market value of at least 102% of the
initial market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 100%. Such collateral shall consist of
cash, securities issued by the U.S. Government, its agencies or
instrumentalities, or irrevocable letters of credit. The lending of securities
is a common practice in the securities industry. The Fund engages in security
loan arrangements with the primary objective of increasing the Fund's income
either through investing cash collateral in short-term interest bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.
Borrowing. The Fund does not borrow money or mortgage or pledge any of its
assets, except that the Fund may borrow for temporary or emergency purposes, in
an amount not to exceed 5% of its total assets.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Fund's Board of Trustees and will be held pursuant to a written agreement.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(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, including illiquid equity securities, defaulted debt securities,
loan participations, repurchase agreements of more than seven days duration, and
other securities which are not readily marketable) may not constitute, at the
time of purchase, more than 10% of the value of the total net assets of the
Fund. Subject to this limitation, the Board of Trustees has authorized the Fund
to invest in restricted securities where such investments are consistent with
the Fund's investment objectives and has authorized such securities to be
considered liquid to the extent the investment manager determines on a daily
basis that there is a liquid institutional or other market for such securities.
Short-Term Investments. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents and, subject to the terms of an
order of exemption from the SEC, the shares of affiliated money market funds
that invest primarily in short-term debt securities. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.
Portfolio Turnover. The Fund anticipates that its annual portfolio turnover rate
generally will not exceed 100%, but this rate should not be construed as a
limiting factor in the operation of the Fund's portfolio.
Other Policies
The Fund is non-diversified under the federal securities laws. As a
non-diversified Fund, there is no restriction under the 1940 Act on the
percentage of the Fund's assets that may be invested in the securities of any
one issuer. The Fund, however, intends to comply with the diversification and
other requirements of the Code applicable to regulated investment companies,
such as the Fund, so that it will not be subject to U.S. federal income tax on
income and capital gain distributions to shareholders. Accordingly, the Fund
will not purchase securities if, as a result, more than 25% of its total assets
would be invested in the securities of a single issuer, or with respect to 50%
of its total assets, more than 5% of such assets would be invested in the
securities of a single issuer. To the extent the Fund is not fully diversified,
it may be more susceptible to adverse economic, political or regulatory
developments affecting a single issuer than if it were more fully diversified.
In addition, it is the present policy of the Fund (which may be changed without
the approval of shareholders) not to invest more than 5% of its total assets in
companies which have a record of less than three years continuous operation,
including predecessors, nor to engage in joint or joint and several trading
accounts in securities, except that an order to purchase or sell may be combined
with orders from other persons to obtain lower brokerage commissions. These
investments, together with any illiquid securities, may not exceed 10% of the
Fund's net assets.
The Fund will not invest more than 25% of its total assets in any one industry.
To the extent required by and in conformance with an interpretive position taken
by the SEC, securities issued by a foreign government, its agencies or
instrumentalities are deemed to constitute an "industry" for purposes of this
limitation.
As long as percentage restrictions are observed by the Fund at the time of
purchase, changes in the value of particular Fund assets, or the assets of the
Fund as a whole, will not cause a violation of any of the foregoing
restrictions.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the SAI.
Risk Considerations
High Yielding, Fixed-Income Securities
Because of the Fund's policy of investing in higher yielding, higher risk
securities, an investment in the Fund is accompanied by a higher degree of risk
than an investment in higher rated, lower yielding securities. Accordingly, an
investment in the Fund should not be considered a complete investment program,
and should be carefully evaluated for its appropriateness in light of the
investor's overall investment needs and goals. Persons on fixed incomes, such as
retired persons, should also consider the increased risk of loss to principal
which is present with an investment in higher risk securities, such as those in
which the Fund invests.
The market values of lower rated, fixed-income securities and unrated securities
of comparable quality (commonly known as "junk bonds") tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Such lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. Bonds rated BB or below by S&P
or Ba or below by Moody's are considered, on balance, to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher rating categories. Even
bonds rated BBB by S&P or Baa by Moody's, ratings which are considered
investment grade, possess some speculative characteristics.
Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers is generally greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, such issuers may not have sufficient
cash flow to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer. In general, securities
which default lose much of their value in the time period prior to the actual
default so that the Fund's assets are impacted prior to the default. The Fund
may retain an issue which has defaulted because such issue may present an
opportunity for subsequent price recovery. As of April 30, 1995, no issues in
the Fund's portfolio were in default.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called securities with lower yielding securities, thus decreasing the net
investment income to the Fund and the dividends to shareholders. The premature
disposition of a high yielding security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications. The Fund may be required under the Code and U.S.
Treasury regulations to accrue income for income tax purposes on defaulted
obligations and to distribute such income to the Fund's shareholders even though
the Fund is not currently receiving interest or principal payments on such
obligations. In order to generate cash to satisfy any or all of these
distribution requirements, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
Purchasers of lower rated, fixed-income securities are predominantly dealers and
other institutional buyers, rather than individuals. The market for such
securities therefore tends to be more concentrated than the market for higher
rated securities which trade in a broader secondary retail market. To the extent
the secondary trading market for a particular high yielding, fixed-income
security does exist, it is generally not as liquid as the secondary market for
higher rated securities. Reduced liquidity in the secondary market may have an
adverse impact on the market price and the Fund's ability to dispose of
particular securities, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of the issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
Current values for such high yield securities are obtained from pricing services
and/or a limited number of dealers and may be based upon factors other than
actual sales. (See "Valuation of Fund Shares.")
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many recent high yielding securities have
been sold with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities, as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. While the Fund may incur special costs in
disposing of such securities, the Fund will generally not incur such costs when
the issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Fund has no arrangement with its underwriters or any other person concerning
the acquisition of such securities, and the investment manager will carefully
review the credit and other characteristics pertinent to such new issues.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession disrupted the
market for high yield securities and adversely affected the value of outstanding
securities and the ability of issuers of such securities to meet their
obligations. Those adverse effects may continue even as the economy recovers.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lower-rated bonds, which appeared during 1989 and 1990, along with
highly publicized defaults of some issuers of high yield securities, and
concerns regarding a sluggish economy which continued in 1993, depressed the
prices for many such securities. In addition, the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on any of its portfolio holdings. The Fund will
rely on the investment manager's judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, the investment manager
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Asset Composition Table
Ratings published by rating services, such as S&P, will be considered in
connection with the Fund's investment in bonds, although such ratings will not
be determinative. The table below shows the percentage of the Fund's assets
invested in securities rated in each of the S&P rating categories and those that
are not rated but deemed by the investment manager to be of comparable quality.
The information was prepared using a dollar weighted average of the Fund's
portfolio composition based on month-end assets for the period July 1, 1994
through April 30, 1995. The Appendix to this Prospectus includes a description
of each rating category.
Average Weighted
S&P Rating Percentage of Assets
AAA....................... 46.90%*
AA+....................... 0.28%
AA........................ 3.52%
A+........................ 1.75%
A......................... 0.14%
BBB+...................... 0.21%
BBB....................... 0.19%
BB+....................... 2.63%
BB........................ 4.49%
BB-....................... 5.46%
B+........................ 9.78%
B......................... 20.04%**
B-........................ 4.61%
*23.27% of these securities are unrated by rating services.
**7.48% of these securities are unrated by rating services.
Foreign Securities
Investments in the securities of companies organized outside the U.S. or whose
securities are principally traded outside the U.S. ("foreign issuers") or
investments in securities denominated or quoted in a foreign currency
("non-dollar securities") may offer potential benefits not available from
investments solely in securities of U.S. issuers or U.S. dollar denominated
securities. Such benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of the investment manager, to offer more
potential for long-term capital appreciation or current earnings than
investments in U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the U.S. and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.
Investments in non-dollar securities or in the securities of foreign issuers
involve significant risks that are not typically associated with investments in
U.S. dollar denominated securities or in securities of U.S. issuers. These
risks, which may involve possible losses, include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes in government administrations and economic or
monetary policies in the U.S. or abroad, changes in circumstances surrounding
dealings between nations, and changes in currency convertibility or exchange
rates could result in investment losses for the Fund. In addition, public
information may not be as available for a foreign company as it is for a U.S.
domiciled company, foreign companies are generally not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. companies, and there is usually less government regulation of
securities exchanges, brokers and listed companies. Confiscatory taxation or
diplomatic developments could also affect these investments.
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 types of foreign
investments. Investments may be in securities of foreign issuers located in both
developed or developing countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
corporate debt or U.S. government securities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. Under certain market conditions, these
investments may be less liquid than U.S. debt securities and are certainly less
liquid than U.S. government securities. Finally, in the event of a default of
any such foreign debt obligations, it may be more difficult for the Fund to
obtain or to enforce a judgment against the issuer of such security.
Securities which may be acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market will not be considered an illiquid asset so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
The Fund may purchase securities in any foreign country, developed or
developing. Investors should consider carefully the substantial risks involved
in investing in securities issued by companies and governments of foreign
countries, risks that are often heightened for investments in developing
markets. For example, the small size, inexperience and limited volume of trading
of securities markets in certain developing countries may make the Fund's
investments in developing countries illiquid and more volatile than investments
in more developed countries, and the Fund may be required to establish special
custody or other arrangements before making certain investments in such
countries. The laws of some foreign countries may also limit the ability of the
Fund to invest in securities of certain issuers located in those countries.
Mortgage Securities
Mortgage securities differ from conventional bonds in that principal is paid
back over the life of the mortgage security rather than at maturity. As a
result, the holder of a mortgage security (i.e., the Fund) receives scheduled
monthly 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 which is lower than the rate on
the existing mortgage security. For this reason, mortgage securities may be less
effective than other types of U.S. government securities as a means of "locking
in" long-term interest rates.
The market value of mortgage securities, like other U.S. government securities,
will generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline. Mortgage
securities may have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
mortgage securities are purchased at a premium, 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 shareholders, will be taxable
as ordinary income.
Options and Futures Contracts
The purchase and sale of futures contracts and options thereon, as well as the
purchase and writing of options on securities and securities indices and
currencies, involve risks different from those involved with direct investments
in securities. A liquid secondary market for a futures or options contract may
not be available when a futures or options position is sought to be closed and
the inability to close a position may have an adverse impact on the Fund's
ability to effectively hedge securities or foreign currency exposure. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is based
and movements in the securities or currency in the Fund's portfolio. Successful
use of futures or options contracts is further dependent on the investment
manager's ability to correctly predict movements in the securities or foreign
currency markets and no assurance can be given that its judgment will be
correct. In addition, by writing covered call options, the Fund gives up the
opportunity to profit from any price increase in the underlying security above
the option exercise price, while the option is in effect.
How Shareholders Participate in
the Results of the Fund's Activities
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets.
To the extent the Fund's investments consist of debt securities, changes in
interest rates will affect the value of the Fund's portfolio and thus its share
price. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. To the extent the Fund's investments consist of common stocks, a
decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in the Fund's share price. To the
extent of the Fund's investment in foreign securities, changes in the prevailing
rates of interest in any of the countries in which the Fund is invested will
likely affect the value of the Fund's holdings and thus the value of Fund
shares. In addition, changes in currency valuations or a decline in the stock
market of any country in which the Fund is invested will impact the price of
Fund shares. History reflects both increases and decreases in the prevailing
rate of interest, in foreign currency valuations and in the valuation of stock
markets in both the U.S. and in foreign countries, and these may reoccur
unpredictably in the future.
Management of the Fund
The Board of Trustees has the primary responsibility for the overall management
of the Fund and for electing the officers of the Fund who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (116 separate series) with aggregate assets of over $77 billion.
Templeton Investment Counsel, Inc. ("TICI" or the "Sub-Adviser") is employed by
Advisers to act as sub-adviser to the Fund. TICI is an indirect subsidiary of
Templeton Worldwide, Inc., which, operating through its subsidiaries, is a major
investment management organization with approximately $52.3 billion of assets
currently under management and a long history of global investing.
Advisers and TICI perform similar services for other funds and there may be
times when the actions taken with respect to the Fund's portfolio will differ
from those taken by the Manager on behalf of other funds. Neither Advisers or
TICI (including their affiliates) nor their officers, directors or employees nor
the officers and trustees of the Trust are prohibited from investing in
securities held by the Fund or other funds which are managed or administered by
Advisers or TICI to the extent such transactions comply with the Fund's Code of
Ethics. Please see "General Information" in the SAI for further information on
securities transactions and a summary of the Fund's Code of Ethics.
Pursuant to the management and sub-advisory agreements, Advisers and TICI
supervise and implement the Fund's investment activities and provide certain
administrative services and facilities which are necessary to conduct the Fund's
business.
During the period from May 24, 1994 (effective date of registration) to April
30, 1995, management fees, before any advance waiver, totaled 0.63% of the
average daily net assets of the Fund. Total operating expenses, including
management fees before any advance waiver, totaled 1.38% of the average daily
net assets of the Fund. Pursuant to an agreement by Advisers to limit its fees,
the Fund paid no management fees and paid operating expenses totaling 0.25% of
the average daily net assets of the Fund. This arrangement may be terminated by
the investment manager at any time.
Among the responsibilities of Advisers and TICI under the management and
sub-advisory agreements is the selection of brokers and dealers through whom
transactions in the Fund's portfolio securities will be effected. Advisers and
TICI try to obtain the best execution on all such transactions. If it is felt
that more than one broker is able to provide the best execution, Advisers and
TICI will consider the furnishing of quotations and of other market services,
research, statistical and other data for Advisers, TICI and their affiliates, as
well as the sale of shares of the Fund, as factors in selecting a broker.
Further information is included under "The Fund's Policies Regarding Brokers
Used on Portfolio Transactions" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
Plan of Distribution
A plan of distribution has been approved and adopted for the Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred by Distributors or
others in the promotion and distribution of the Fund's shares. Such expenses may
include, but are not limited to, 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 prorated portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution or service fees
paid to securities dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its affiliates. The maximum
amount which the Fund may reimburse to Distributors or others for such
distribution expenses is 0.25% per annum of its average daily net assets,
payable on a quarterly basis. All expenses of distribution in excess of 0.25%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Fund. The Plan also covers any payments to or by
the Fund, Advisers, Distributors, or other parties on behalf of the Fund,
Advisers or Distributors, to the extent such payments are deemed to be 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. The payments under the Plan
are included in the maximum operating expenses which may be borne by the Fund.
For more information, please see the SAI.
Distributions to Shareholders
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
Distribution Date
Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends monthly for shareholders of record on the last business day of the
month, payable on or about the 15th day of the following month. The amount of
income dividend payments by the Fund is dependent upon the amount of net income
received by the Fund from its portfolio holdings, is not guaranteed and is
subject to the discretion of the Board of Trustees. Fund shares are quoted
ex-dividend on the first business day following the record date. The Fund does
not pay "interest" or guarantee any fixed rate of return on an investment in its
shares.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
Dividend Reinvestment
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a sales
charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value in the Fund
or Class I shares of other Franklin Templeton Funds, as defined under "How to
Buy Shares of the Fund." Shareholders have the right to change their election
with respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the SAI for
more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
Class I shares of another fund in the Franklin Group of Funds(R) or the
Templeton Funds, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days for
initial processing. Dividends which may be paid in the interim will be sent to
the address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department.
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
For corporate investors, it is anticipated that only a small portion of the
Fund's dividends will qualify for the corporate dividends-received deduction
because of the Fund's principal investment in debt securities. To the extent
that the Fund pays dividends which qualify for this deduction, the availability
of the deduction is subject to certain holding period and debt financing
restrictions imposed under the Code on the corporation claiming the deduction.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes on
their shares of the Fund and distributions and redemption proceeds received from
the Fund.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, either directly or through affiliates, have an agreement
with Distributors to handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through retirement plans established by the Franklin Templeton
Group. The Fund and Distributors reserve the right to refuse any order for the
purchase of shares.
Purchase Price of Fund Shares
Shares of the Fund are offered at the public offering price, which is determined
by adding the net asset value per share plus a front-end sales charge, next
computed (1) after the shareholder's securities dealer receives the order which
is promptly transmitted to the Fund or (2) after receipt of an order by mail
from the shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. The offering price will be calculated to two decimal places using standard
rounding criteria. A description of the method of calculating net asset value
per share is included under the caption "Valuation of Fund Shares."
Set forth below is a table showing front-end sales charges and dealer
concessions.
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more NONE NONE (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. A securities
dealer who receives 90% or more of the sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**Distributors will 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 but less than $2 million, plus 0.60% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more. Dealer concession
breakpoints are reset every 12 months for purposes of additional purchases.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within the contingency period.
See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investments in one or more of the funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by Distributors or
its affiliates, and (c) the U.S. registered mutual funds in the Templeton Group
of Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund (the "Templeton
Funds"). Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Fund(s)." Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment qualifies
for a discount.
Other Payments to Securities Dealers. Either Distributors or one of its
affiliates may make payments, out of its own resources, of up to 0.75% of the
amount purchased to securities dealers who initiate and are responsible for
purchases made at net asset value by non-designated retirement plans, and up to
1% of the amount purchased to securities dealers who initiate and are
responsible for purchases made at net asset value by certain designated
retirement plans (excluding IRA and IRA rollovers), certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more. See "Description of
Special Net Asset Value Purchases" and the SAI.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds, and other
dealer-sponsored programs or events. In some instances, this compensation may be
made available only to certain securities dealers whose representatives have
sold or are expected to sell significant amounts of shares of the Franklin
Templeton Funds. Compensation may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Securities
dealers may not use sales of the Fund's shares to qualify for this compensation
to the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned additional compensation is paid for by the Fund
or its shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI.
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of the investor's spouse,
children under the age of 21 and grandchildren under the age of 21. The value of
Class II shares owned by the investor may also be included for this purpose.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. The investor or the
investor's securities dealer must inform Investor Services or Distributors that
this Letter is in effect each time a purchase is made.
An investor acknowledges and agrees to the following provisions by completing
the Letter of Intent section of the Shareholder Application: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not be
available for redemption by the investor until the Letter of Intent has been
completed or the higher sales charge paid. This policy regarding the reservation
of shares does not apply to certain benefit plans described under "Purchases At
Net Asset Value." For more information, see "Additional Information Regarding
Purchases" in the SAI.
Although the sales charge on Class II shares cannot be reduced through these
programs, the value of Class II shares owned by the investor may be included in
determining a reduced sales charge to be paid on Class I shares pursuant to the
Letter of Intent and Rights of Accumulation programs.
Group Purchases
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the members of the group, plus the amount of the
current purchase. For example, if members of the group had previously invested
and still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.50%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3)
insurance company separate accounts for pension plan contracts; (4) accounts
managed by the Franklin Templeton Group; (5) shareholders of Templeton
Institutional Funds, Inc. reinvesting redemption proceeds from that fund under
an employee benefit plan qualified under Section 401 of the Code, in shares of
the Fund; (6) certain unit investment trusts and unit holders of such trusts
reinvesting their distributions from the trusts in the Fund; (7) registered
securities dealers and their affiliates, for their investment account only; and
(8) current employees of securities dealers and their affiliates and by their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of the Fund or another of
the Class I Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. If a
different class of shares is purchased, the full front-end sales charge must be
paid at the time of purchase of the new shares. An investor may reinvest an
amount not exceeding the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed and subsequently
repurchased, a new contingency period will begin. Shares that were no longer
subject to a contingent deferred sales charge will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
redeemed in connection with an exchange into another of the Franklin Templeton
Funds (see "Exchange Privilege") are not considered "redeemed" for this
privilege. In order to exercise this privilege, a written order for the purchase
of shares of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 365 days after the redemption. The 365 days, however, do
not begin to run on redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD (including any
rollover) matures. Reinvestment at net asset value may also be handled by a
securities dealer or other financial institution, who may charge the shareholder
a fee for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and the
tax basis of the shares reinvested. If there has been a loss on the redemption,
the loss may be disallowed if a reinvestment in the same fund is made within a
30-day period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
Shares of the Fund may be purchased at net asset value and without a contingent
deferred sales charge by persons who have received dividends and capital gain
distributions from investments in the Fund or another Franklin Templeton Fund
within 365 days of the payment date of such distribution. To exercise this
privilege, a written request to reinvest the distribution must accompany the
purchase order. Additional information may be obtained from Shareholder Services
at 1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in a mutual fund which is not part of
the Franklin Templeton Funds and which was subject to a front-end sales charge
or a contingent deferred sales charge, and which has investment objectives
similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers who have
entered into a supplemental agreement with Distributors, or by registered
investment advisors affiliated with such broker-dealers, on behalf of their
clients who are participating in a comprehensive fee program (sometimes known as
a wrap fee program).
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Templeton Funds (including former participants of the Franklin Templeton Profit
Sharing 401(k) plan), to the extent of such distribution. In order to exercise
this privilege a written order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust Company"), the Fund or
Investor Services, within 365 days after the plan distribution.
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. In connection with investments by eligible governmental
authorities at net asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
Description of Special Net Asset Value Purchases
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in this Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements, as well as the uniform criteria for qualified groups
previously described under "Group Purchases" which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to the amount to be purchased, which may be
established by Distributors. Currently those criteria require that the amount
invested or to be invested during the subsequent 13-month period in the Fund or
any of the Franklin Templeton Investments must total at least $1,000,000. Orders
for such accounts will be accepted 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 such order.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of organizations
with collective retirement plan assets of $10 million or more, without regard to
where such assets are currently invested.
Refer to the SAI for further information regarding net asset value purchases.
General
Securities laws of states in which the Fund's shares are offered for sale may
differ from the federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
Purchasing Shares of the Fund in
Connection with Retirement Plans
Involving Tax-Deferred Investments
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or Trust Company may provide the plan
documents and serve as custodian or trustee. A plan document must be adopted in
order for a retirement plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for retirement plans. Brochures for the Trust Company plans contain
important information regarding eligibility, contribution and deferral limits
and distribution requirements. Please note that an application other than the
one contained in this Prospectus must be used to establish a retirement plan
account with the Trust Company. To obtain a retirement plan brochure or
application, call 1-800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from the Trust Company retirement plans.
Individuals and plan sponsors should consult with a legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested by the shareholder or by the securities dealer.
Confirmations
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during the period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Automatic Investment Plan Application
included with this Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject to mandatory
distribution requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis. If the
shareholder establishes a plan, any capital gain distributions and income
dividends paid by the Fund will be reinvested for the shareholder's account in
additional shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction (which is
generally the first business day of the month in which the payment is scheduled)
with payment generally received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to the same class
of another of the Franklin Templeton Funds, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Payments which may be paid
in the interim will be sent to the address of record. Liquidation of shares may
reduce or possibly exhaust the shares in the shareholder's account, to the
extent withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's actual yield
or income, part of the payment may be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. Also, redemptions of shares may be subject
to a contingent deferred sales charge if the shares are redeemed within 12
months of the calendar month of the original purchase date. The shareholder
should ordinarily not make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time such a plan is in
effect. The applicable contingent deferred sales charge is waived for share
redemptions of up to 1% monthly of an account's net asset value (12% annually,
6% semiannually, 3% quarterly). For example, if an account maintained an annual
balance of $1,000,000, only $120,000 could be withdrawn through a once-yearly
Systematic Withdrawal Plan free of charge; any amount over that $120,000 would
be assessed a 1% contingent deferred sales charge. A Systematic Withdrawal Plan
may be terminated on written notice by the shareholder or the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments, or suspend one such
payment by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for the same class of shares of other Franklin Templeton Funds which
are eligible for sale in the shareholder's state of residence and in conformity
with such fund's stated eligibility requirements and investment minimums. Before
making an exchange, investors should review the prospectus of the fund they wish
to exchange from and the fund they wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitation on a fund's sale of its shares, minimum holding periods or applicable
sales charges.
No exchanges between different classes of shares will be allowed. Shareholders
may choose to redeem shares of the Fund and purchase Class II shares of another
Franklin Templeton Fund but such purchase will be subject to that fund's Class
II front-end and contingent deferred sales charges. Although there are no
exchanges between different classes of shares, Class II shareholders of a
Franklin Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value. A contingent deferred sales charge
will not be imposed on exchanges. If, however, the exchanged shares were subject
to a contingent deferred sales charge in the original fund purchased and shares
are subsequently redeemed within the contingency period, a contingent deferred
sales charge will be imposed.
Exchanges may be made in any of the following ways:
Exchanges by Mail
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
Exchanges by Telephone
Shareholders, or their investment representative of record, if any, may exchange
shares of the Fund by telephone by calling Investor Services at 1-800/632-2301
or the automated Franklin TeleFACTS(R) system (day or night) at 1-800/247-1753.
If the shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The telephone exchange privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account of the same class of shares in
one of the other available Franklin Templeton Funds. The telephone exchange
privilege is available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "Exchanges by Telephone"
above. Such a dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
Additional Information Regarding Exchanges
If the account has shares subject to a contingent deferred sales charge, the
shares will be exchanged into the new account on a "first-in, first-out" basis.
The contingency period of 12 months during which a contingent deferred sales
charge may be assessed will be tolled (or stopped) for the period shares are
exchanged into and held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset value of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How To Buy Shares
of the Fund." Exchanges of shares of the Fund which were purchased with a lower
sales charge into a fund which has a higher sales charge will be charged the
difference, unless the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests the exchange of the
total value of the Fund account, declared but unpaid income dividends and
capital gain distributions will be transferred to the fund being exchanged into
and will be invested at net asset value. Because the exchange is considered a
redemption and purchase of shares, the shareholder may realize a gain or loss
for federal income tax purposes. Backup withholding and information reporting
may also apply. Information regarding the possible tax consequences of such an
exchange is included in the tax section in this Prospectus and in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
Retirement Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange. All
other exchanges are without charge.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) makes more than two exchanges out of the Fund per
calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the investment manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if the
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
Redemptions by Mail
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share (less the
contingent deferred sales charge, if applicable) next computed after the written
request in proper form is received by Investor Services. Redemption requests
received after the time at which the net asset value is calculated (at the
scheduled close of the New York Stock Exchange (the "Exchange") which is
generally 1:00 p.m. Pacific time) each day that the Exchange is open for
business, will receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number where they may be
reached during business hours, or in the evening if preferred. Investor
Services' ability to contact a shareholder promptly when necessary will speed
the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signatures guaranteed as referenced above. Shareholders are
advised, for their own protection, to send the share certificate and assignment
form in separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the restricted account
exception noted under "Telephone Transactions - Restricted Accounts."
Information may also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
given by telephone are genuine. Shareholders, however, bear the risk of loss in
certain cases as described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before the scheduled close of
the Exchange (generally 1:00 p.m. Pacific time) on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
that wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement, which is available from the
Franklin Templeton Institutional Services Department by telephoning
1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. The documents
described under "Redemptions by Mail" above, as well as a signed letter of
instruction, are required regardless of whether the shareholder redeems shares
directly or submits such shares to a securities dealer for repurchase. A
shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's repurchase
order and the date the redemption is processed upon receipt of all documents
necessary to settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. The shareholder's dealer may charge a fee for handling the order.
The SAI contains more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived for: exchanges; any account fees;
distributions from an individual retirement plan account due to death or
disability or upon periodic distributions based on life expectancy; tax-free
returns of excess contributions from employee benefit plans; distributions from
employee benefit plans, including those due to termination or plan transfer;
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually); redemptions initiated by the Fund due to a
shareholder's account falling below the minimum specified account size; and
redemptions following the death of the shareholder or the beneficial owner.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a specified dollar
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a specific
number of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. The right of redemption may be suspended or the date of
payment postponed if the Exchange is closed (other than customary closing) or
upon the determination of the SEC that trading on the Exchange is restricted or
an emergency exists, or if the SEC permits it, by order, for the protection of
shareholders. Of course, the amount received may be more or less than the amount
invested by the shareholder, depending on fluctuations in the market value of
securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, a shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 591/2, unless the distribution meets one of the exceptions
set forth in the Code.
Other Information
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to execute various telephone transactions,
including to: (i) effect a change in address, (ii) change a dividend option (see
"Restricted Accounts" below), (iii) transfer Fund shares in one account to
another identically registered account in the Fund, (iv) request the issuance of
certificates, to be sent to the address of record only, and (v) exchange Fund
shares as described in this Prospectus by telephone. In addition, shareholders
who complete and file an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
The Fund and Investor Services may be liable for any losses due to unauthorized
or fraudulent instructions in the event such reasonable procedures are not
followed. Shareholders are, of course, under no obligation to apply for or
accept telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement plan accounts. To assure compliance with all
applicable regulations, special forms are required for any distribution,
redemption, or dividend payment. While the telephone exchange privilege is
extended to Franklin Templeton IRA and 403(b) retirement accounts, certain
restrictions may apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
Valuation of Fund Shares
The net asset value per share of the Fund is determined as of the scheduled
closing of the Exchange (generally 1:00 p.m. Pacific time) each day that the
Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities is deducted from the aggregate gross value of
all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their realizable amounts,
interest is recorded as accrued and dividends are recorded on the ex-dividend
date. Portfolio securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily available are
valued at the last quoted sale price of the day or, if there is no such reported
sale, within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager. Portfolio securities underlying actively traded call
options are valued at their market price as determined above. The current market
value of any option held by the Fund is its last sale price on the relevant
exchange prior to the time when assets are valued. Lacking any sales that day or
if the last sale price is outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices, if such valuation is
believed to fairly reflect the contract's market value. Other securities for
which market quotations are readily available are valued at the current market
price, which may be obtained from a pricing service, based on a variety of
factors, including recent trades, institutional size trading in similar types of
securities (considering yield, risk and maturity) and/or developments related to
specific issues. Securities and other assets for which market prices are not
readily available are valued at fair value as determined following procedures
approved by the Board of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the Exchange, if that is earlier, and that value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask price is used.
Occasionally, events which 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 Fund's net asset value, unless material. If events materially affecting
the value of the foreign securities or exchange rates occur during such period,
then the foreign security will be valued in accordance with procedures
established by the Board of Trustees.
How to Get Information Regarding an
Investment in the Fund
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, Franklin and Templeton shareholders may access an
automated system (day or night) which offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, shareholders may
obtain Class I and Class II account information, current price and, if
available, yield or other performance information specific to the Fund or any
Franklin Templeton Fund. In addition, Franklin Class I shareholders may process
an exchange, within the same class, into an identically registered Franklin
account and request duplicate confirmation or year-end statements, money fund
checks, if applicable, and deposit slips.
Fund information may be accessed by entering Fund Code 194 followed by the #
sign. The system's automated operator will prompt the caller with easy to follow
step-by-step instructions from the main menu. Other features may be added in the
future.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following list of the various Franklin departments,
telephone numbers and hours of operation to call is provided. The same numbers
may be used when calling from a rotary phone:
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin or Templeton's
service departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
Performance
Advertisements, sales literature and communications to shareholders may contain
several measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may occasionally
cite statistics to reflect the Fund's volatility or risk.
Average annual total return figures, as prescribed by the SEC, represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes, total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments. It is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield, which is calculated according to a formula prescribed by the SEC (see the
SAI), is not indicative of the dividends or distributions which were or will be
paid to the Fund's shareholders. Dividends or distributions paid to shareholders
are reflected in the current distribution rate, which may be quoted to
shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. Under certain circumstances, such as when there
has been a change in the amount of dividend payout or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
during the period such policies were in effect, rather than using the dividends
during the past 12 months. 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 gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, distribution rate or total return may be in any future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends April 30. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the SAI.
Organization and Voting Rights
The Trust was organized as a Delaware business trust on January 25, 1991. The
Agreement and Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest, with a par value of
$.01 per share, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. The Trust reserves the
right to issue additional classes of shares of the Fund, or to add additional
series to the Trust.
Shares of each series have equal rights as to voting and vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. Voting rights are noncumulative so that, in any election of trustees,
the holders of more than 50% of the shares voting can elect all of the trustees,
if they choose to do so, and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special shareholders' meeting of a series for such purposes as
changing fundamental investment restrictions for the series, approving a new
management agreement or any other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be called by the trustees,
in their discretion, or by shareholders holding at least ten percent of the
outstanding shares of the Trust. Shareholders will receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees, such as that provided in Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder.
More information is included in the SAI.
Conversion to Master/Feeder Fund Structure
Currently, in seeking to accomplish its objectives, the Fund invests directly in
a portfolio of securities, as described in "Investment Objectives and Policies
of the Fund." Certain funds administered by the Manager participate as feeder
funds in a master/feeder fund structure. Under a master/feeder structure, one or
more feeder funds invests its assets in a master fund, which, in turn, invests
its assets directly in securities. The Fund reserves the right to convert to a
master/feeder fund structure at a future date.
Various state governments have adopted the North American Securities
Administrators Association Guidelines for registration of master/feeder funds.
If required by those guidelines, as then in effect, the Fund will seek
shareholder approval prior to converting the Fund to a master/feeder structure,
subject to there not being adopted a superseding contrary provision or ruling
under federal law. If it is determined by the requisite regulatory authorities
that such approval is not required, shareholders will be deemed to have
consented to such conversion by their purchase of Fund shares and no further
shareholder approval will be sought or needed. Shareholders will, however, be
informed in writing in advance of the conversion. The determination to convert
the Fund to a master/feeder fund structure will not result in an increase in the
fees or expenses paid by the Fund or its shareholders. The investment objectives
and other fundamental policies of the Fund, which can be changed only with
shareholder approval, are structured so as to permit the Fund to invest directly
in securities or indirectly in securities through a master/feeder fund
structure.
Account Registrations
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures, the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. Account transfers may
be effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a securities dealer notifies the Fund that the number furnished by
the shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolio: Mr. Molumphy since the Fund's inception and Mr. Dickson
since June 1995.
Chris Molumphy
Portfolio Manager
Franklin Advisers, Inc.
Mr. Molumphy is a Chartered Financial Analyst and holds a Master's of Business
Administration degree in finance from the University of Chicago. He earned his
Bachelor of Arts degree in economics from Stanford University. Mr. Molumphy is a
member of several securities industry associations. He joined Franklin in 1988.
Thomas J. Dickson
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Dickson received his Bachelor of Science degree in managerial economics from
the University of California at Davis. He joined Franklin in 1992 and moved to
Templeton in 1994.
Appendix
Description of Moody's corporate bond ratings
Aaa - Bonds which are 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 which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements and their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are 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 which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Description of S&P corporate bond ratings
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,
these bonds differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Commercial Paper Ratings
Moody's
Moody's Commercial Paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, 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 is, however, 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.
