PROSPECTUS
FRANKLIN STRATEGIC INCOME FUND - ADVISOR CLASS
MAY 28, 1999
INVESTMENT STRATEGY INCOME
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes the fund's Advisor Class shares. The fund currently
offers other share classes with different sales charge and expense
structures, which affect performance.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated May 28, 1999, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the fund's other share classes,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE FUND MAY INVEST UP TO 100% OF ITS NET ASSETS IN NON-INVESTMENT GRADE
BONDS OF BOTH U.S. AND FOREIGN ISSUERS. THESE ARE COMMONLY KNOWN AS "JUNK
BONDS." THEIR DEFAULT AND OTHER RISKS ARE GREATER THAN THOSE OF HIGHER RATED
SECURITIES. YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE
FUND. PLEASE SEE "WHAT ARE THE RISKS OF INVESTING IN THE FUND?"
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN STRATEGIC INCOME FUND - ADVISOR CLASS
May 28, 1999
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
How Does the Fund Invest Its Assets?.....................
What Are the Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How Taxation Affects the Fund and Its Shareholders.......
How Is the Trust Organized?.......................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
APPENDIX
Description of Ratings.................................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. Since Advisor Class shares were not offered until May 28, 1999, the
table is based on the historical expenses of the fund's Class A shares for
the fiscal year ended April 30, 1998. The fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases None
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.61%**
Rule 12b-1 Fees None
Other Expenses 0.18%
Total Fund Operating Expenses 0.79%**
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $10,000 that you invest
in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$81 $252 $439 $978
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE
shown. The fund pays its operating expenses. The effects of these
expenses are reflected in its Net Asset Value or dividends and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
*This fee is only for Market Timers.
**For the period shown, the manager had agreed in advance to waive its
management fees and to assume as its own expense certain expenses otherwise
payable by the fund. With this reduction, the fund paid no management fees
and total operating expenses for Advisor Class would have been 0%.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The primary investment goal of the fund is to obtain a high level of current
income, with capital appreciation over the long term as a secondary goal.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
WHAT IS THE FUND'S INVESTMENT STRATEGY?
The fund uses an active asset allocation strategy to try to achieve its goals
of income and capital appreciation. This means the fund allocates its assets
among securities in various market sectors based on the manager's assessment
of changing economic, market, industry, and issuer conditions. The manager
uses a "top-down" analysis of macroeconomic trends combined with a
"bottom-up" fundamental analysis of market sectors, industries, and issuers
to try to take advantage of varying sector reactions to economic events. The
manager will evaluate country risk, business cycles, yield curves, and values
between and within markets.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
The fund normally invests at least 65% of its assets in U.S. and foreign debt
securities, government securities, mortgage securities, asset-backed
securities, convertible securities, and preferred stock. The fund may invest
up to 35% of its assets in common stocks.
In selecting these securities for the fund's portfolio, the manager gives
particular consideration to current income, but may also consider the
potential for capital appreciation.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock, preferred stock, and
convertible securities.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes, and commercial paper.
The fund may buy both rated and unrated securities. Independent rating
organizations rate debt and other fixed-income securities based upon their
assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Non-investment grade securities are those rated
lower than BBB by S&P or Baa by Moody's. The fund may invest in securities
rated in any category, including without limit in lower rated debt securities
such as high yield corporate securities. The fund generally invests in
securities that are rated at least Caa by Moody's or CCC by S&P, or unrated
securities that it determines to be of comparable quality. Please see the
appendix and the SAI for a description of these ratings.
MORTGAGE SECURITIES
GENERAL Mortgage securities represent an ownership interest in mortgage loans
made by banks and other financial institutions to finance purchases of homes,
commercial buildings or other real estate. These mortgage loans may have
either fixed or adjustable interest rates. The individual mortgage loans are
packaged or "pooled" together for sale to investors. As the underlying
mortgage loans are paid off, investors receive principal and interest
payments.
The fund may invest in mortgage-backed securities that are issued by U.S.
government agencies and private institutions. The payment of interest and
principal on securities issued by U.S. government agencies generally is
guaranteed either by the full faith and credit of the U.S. government or by
the credit of the agency. The guarantee applies only to the timely repayment
of principal and interest and not to the market prices and yields of the
securities or to the Net Asset Value or performance of the fund, which will
vary with changes in interest rates and other market conditions. The U.S.
government and its agencies do not guarantee mortgage-backed securities
issued by private institutions.
Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments of regular interest and principal
payments, as well as unscheduled prepayments, on the underlying mortgages.
Collateralized mortgage obligations ("CMOs") and stripped mortgage securities
are not pass-through securities.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS") are interests in pools of
mortgages with interest rates that reset periodically. Investing in ARMS
allows the fund to participate in increases in interest rates, resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, the interest rates on the underlying mortgages may
readjust downward, resulting in lower current yields.
STRIPPED MORTGAGE-BACKED SECURITIES typically have two classes, each
receiving different proportions of the interest and principal distributions
on a pool of mortgage loans.
CMOS are fixed-income securities that are collateralized by pools of mortgage
loans created by commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers, and other U.S. issuers. The
underlying mortgages are backed by residential and various types of
commercial properties. The timely payment of interest and principal (but not
the market value) of some of the underlying pools is supported by insurance
or guarantees issued by private issuers and, in some cases, U.S. government
agencies.
ASSET-BACKED SECURITIES are securities backed by home equity loan
receivables; credit card receivables; automobile, mobile home, and
recreational vehicle loans and leases; and other receivables. The fund may
invest in asset-backed securities rated in any category.
AMERICAN DEPOSITARY RECEIPTS. The fund may also invest in American Depositary
Receipts. American Depositary Receipts are certificates that give their
holders the right
to receive securities of a foreign issuer deposited in a U.S. bank or trust
company.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills and bonds, which
are direct obligations of the U.S. government, backed by the full faith and
credit of the U.S. Treasury, and in securities issued or guaranteed by
federal agencies. The fund may also invest in securities issued or guaranteed
by foreign governments and their agencies.
CONVERTIBLE SECURITIES generally are preferred stock or debt securities that
pay dividends or interest and may be converted into common stock.
SHORT-TERM INVESTMENTS. The fund may invest cash being held for liquidity
purposes in short-term debt instruments, including U.S. government
securities, high-grade commercial paper, repurchase agreements and other
money market equivalents.
GENERAL. The fund may buy foreign securities that are traded in the U.S. or
directly in foreign markets, and may buy securities denominated in foreign
currencies. The fund is non-diversified, which means that there is no
restriction under the federal securities laws on the percentage of its assets
that it may invest in the securities of any one issuer. The fund currently
intends not to invest more than 5% of its total assets in companies that have
a record of less than three years' continuous operation, including
predecessors. These investments, together with any illiquid securities, may
not exceed 10% of the fund's net assets. In addition, the fund may not 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 and except that the fund may engage in
joint repurchase agreement arrangements.
Please see the SAI for more details on the types of securities in which the
fund invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high-grade commercial paper, repurchase
agreements and other money market equivalents.
REPURCHASE AGREEMENTS. The fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
SECURITIES LENDING. To generate additional income, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. Such loans may not exceed 331/3% of the value of the fund's total
assets measured at the time of the most recent loan. The fund currently
intends not to exceed 10% of the value of its total assets at the time of the
most recent loan. For each loan the borrower must maintain collateral with
the fund's custodian with a value at least equal to 100% of the current
market value of the loaned securities.
OPTIONS. The fund may buy and sell options on securities, securities indices,
and futures contracts. The fund may buy and sell options on foreign
currencies to protect its portfolio against exchange rate movements. The fund
may only sell covered options. An option on a security or futures contract is
a contract that allows the buyer of the option the right to buy or sell a
specified security or futures contract from or to the seller at a specified
price during the term of the option. An option on a securities index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. The fund may only buy options on
securities and securities indices if the total premiums it paid
for such options is 5% or less of its total assets.
FUTURES CONTRACTS. Changes in interest rates, securities prices or foreign
currency valuations may affect the value of the fund's investments. To reduce
its exposure to these factors, the fund may buy and sell financial futures
contracts and foreign currency futures contracts and options on these
contracts. A financial futures contract is an agreement to buy or sell a
specific security or commodity at a specified future date and price. A
futures contract on a foreign currency is an agreement to buy or sell a
specific 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.
FOREIGN CURRENCY EXCHANGE CONTRACTS. To help protect its portfolio against
adverse changes in foreign currency exchange rates or to earn additional
income, the fund may enter into forward foreign currency contracts, which are
agreements to buy or sell a specific currency at a set price on a future date.
INTEREST RATE AND CURRENCY SWAPS. Swap agreements typically are individually
negotiated agreements that are structured to enable the parties to shift
("swap") investment exposure from one type of investment to another. Interest
rate swaps involve an exchange between the parties 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.
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.
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
securities on a specified future date.
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. The fund will acquire loan participations
selling at a discount to par value 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 manager may acquire loan
participations for the fund when it believes, over the long term,
appreciation will occur. An investment in these 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 buy defaulted debt securities if, in the opinion of the manager, it
appears the issuer may resume interest payments or other advantageous
developments appear likely in the near future.
BORROWING. The fund does not borrow money or mortgage or pledge any of its
assets, except that it may borrow for temporary or emergency purposes in an
amount not to exceed 5% of its total assets.
ILLIQUID INVESTMENTS. The fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
There is no assurance that the fund will meet its investment goal.
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decrease. In this way, you participate in any change in the value
of the securities owned by the fund. In addition to the factors that affect
the value of any particular security that the fund owns, the value of fund
shares may also change with movements in the stock and bond markets as a
whole.
CREDIT RISK. The fund's investments in fixed-income securities involve credit
risk. Credit risk is the possibility that the issuer of a debt security or
the borrower on an underlying mortgage or debt obligation will be unable to
make interest payments or repay principal. Changes in an issuer's or
borrower's financial strength or in a security's credit rating may affect its
value. Even securities supported by credit enhancements have the credit risk
of the entity providing the credit support. Credit support provided by a
foreign entity may be less certain because of the possibility of adverse
foreign economic, political or legal developments that may affect the ability
of that foreign entity to meet its obligations. Changes in the credit quality
of the credit provider could affect the value of the security and the fund's
share price.
Securities rated below investment grade, sometimes called "junk bonds,"
generally have more credit risk than higher-rated securities. The risk of
default or price changes due to changes in the issuer's credit quality is
greater. Issuers of lower-rated securities are typically in weaker financial
health than issuers of higher-rated securities, and their ability to make
interest payments or repay principal is less certain. These issuers are also
more likely to encounter financial difficulties and to be materially affected
by these difficulties when they do encounter them. The market price of
lower-rated securities may fluctuate more than higher-rated securities and
may decline significantly in periods of economic difficulty. Lower-rated
securities may also be less liquid than higher-rated securities.
The fund may invest without limit in securities rated below investment grade.
The following table provides a summary of the credit quality of the fund's
portfolio. These figures are dollar-weighted averages of month-end assets
during the fiscal year ended April 30, 1998.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 31.16%
AA 12.04%
A1 1.35%
BBB 1.97%
BB2 20.99%
B3 30.21%
CCC 2.00%
D 0.06%
Not Rated 0.22%
10.46% are unrated by S&P but determined to be comparable to securities rated
A and have been included in the A rating category.
23.87% are unrated by S&P but determined to be comparable to securities rated
BB and have been included in the BB rating category.
33.78% are unrated by S&P but determined to be comparable to securities rated
B and have been included in the B rating category.
Because the fund may 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.
Please see the SAI for more details on the risks associated with lower-rated
securities.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES RISK. The market value of
fixed-rate mortgage securities, like other fixed-income securities, will
generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates fall. Because
interest rates of ARMS move with market interest rates, their values tend to
fluctuate to a lesser degree and are unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments.
Mortgage-backed securities differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing, or foreclosure on the underlying mortgage loans.
During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at
lower rates. The fund may be forced to reinvest returned principal at lower
interest rates, reducing the fund's income. For this reason, mortgage-backed
securities may be less effective than other types of securities as a means of
"locking in" long-term interest rates and may have less potential for capital
appreciation during periods of falling interest rates than other investments
with similar maturities.
A reduction in the anticipated rate of principal prepayments, especially
during periods of rising interest rates, may increase the effective maturity
of mortgage-backed securities, making them more susceptible than other debt
securities to a decline in market value when interest rates rise. This could
increase the volatility of the fund's returns and share price.
Some ARMS in which the fund may invest are backed by mortgages having limits
on the amount the loan rate can fluctuate. During periods of extreme
fluctuations in market interest rates, the interest rates on the underlying
mortgages will not adjust beyond the limits, and the securities will behave
more like long-term, fixed-rate debt securities. This could increase the
volatility of the fund's return and share price.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests. The value of these
securities is extremely sensitive to changes in interest rates and the rate
of principal payments and prepayments on the underlying mortgage assets.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided
to support these securities, if any, may be inadequate to protect investors
in the event of a default. Like mortgage-backed securities, asset-backed
securities are subject to prepayment risk.
NON-DIVERSIFICATION RISK. There is no limit on the amount of the fund's
assets that it can invest in any one issuer. Economic, business, political,
or other changes can affect securities of a similar type. As a
non-diversified fund, the fund may be more sensitive to these changes.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets. Investments in American
Depositary Receipts also involve some or all of the risks described below.
The political, economic, and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in
these countries include the possibility of the imposition of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The funds may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies, and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
Some of the countries in which the fund may invest such as Russia and certain
Asian and Eastern European countries are considered developing or emerging
markets. Investments in these markets are subject to all of the risks of
foreign investing generally, and have additional and heightened risks due to
a lack of legal, business, and social frameworks
to support securities markets.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions, and risk of loss arising out of
the system of share registration and custody. For more information on the
risks associated with emerging markets securities, please see the SAI.
On July 1, 1997, Hong Kong reverted to the sovereignty of China. As with any
major political transfer of power, this could result in political, social,
economic, market, or other developments in Hong Kong, China, or other
countries that could affect the value of the fund's investments.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions, futures contracts, and swap agreements are
considered derivative investments. To the extent the fund enters into these
transactions, their success will depend upon the manager's ability to predict
pertinent market movements. These securities are subject to the risk that the
other party to the transaction may fail to perform, resulting in losses to
the fund.
INTEREST RATE, CURRENCY AND MARKET RISK. To the extent the fund invests in
debt securities, changes in interest rates in any country where the fund is
invested will affect the value of the fund's portfolio and its share price.
Rising interest rates, which often occur during times of inflation or a
growing economy, are likely to have a negative effect on the value of the
fund's shares. To the extent the fund invests in common stocks, a general
market decline in any country where the fund is invested may cause the value
of what the fund owns, and thus the fund's share price, to decline. Changes
in currency valuations may also affect the price of fund shares. The value of
stock markets, currency valuations and interest rates throughout the world
have increased and decreased in the past. These changes are unpredictable.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each issuer and its major suppliers to verify their Year 2000
readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. manages the fund's assets and
makes its investment decisions. The manager also performs similar services
for other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, the manager and its affiliates manage over $208 billion
in assets. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the fund's Code of Ethics.
Under an agreement with the manager, Templeton Investment Counsel, Inc. is
the sub-advisor of the fund. The sub-advisor provides the manager with
investment management advice and assistance. The sub-advisor's activities are
subject to the Board's review and control, as well as the manager's
instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is:
Christopher Molumphy
Senior Vice President of Franklin Advisers, Inc.
Mr. Molumphy is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Chicago. He earned his Bachelor
of Arts degree in Economics from Stanford University. He has been with the
Franklin Templeton Group since 1988. Mr. Molumphy is a member of several
securities industry-related associations.
Thomas J. Dickson
Portfolio Manager of Templeton Investment Counsel, Inc.
Mr. Dickson is currently a portfolio manager for several Franklin Templeton
mutual funds. He holds a BS in managerial economics from the University of
California at Davis. Prior to joining the Templeton organization in 1994, Mr.
Dickson worked as a fixed-income analyst and trader for Franklin Advisers,
Inc. Mr. Dickson currently manages fixed income and currency trading for the
Templeton organization and has country responsibilities for Australia,
Canada, Japan and New Zealand.
Eric G. Takaha
Vice President of Franklin Advisers, Inc.
Mr. Takaha is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Stanford University. He earned his Bachelor of
Science degree in Business Administration from the University of California
at Berkeley. Mr. Takaha joined the Franklin Templeton Group in July of 1989.
He is a member of several securities industry-related associations.
MANAGEMENT FEES. During the fiscal year ended April 30, 1998, management
fees, before any advance waiver, totaled 0.61% of the average daily net
assets of the fund. Total operating expenses were 1.04% for Class A. Under an
agreement by the manager to waive its fees, the fund paid no management fees
and operating expenses totaling 0.24% for Class A. The manager may end this
arrangement at any time upon notice to the Board. During the same period, the
manager paid the sub-advisor no sub-advisory fees.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended April 30, 1998, administration fees totaling 0.15% of
the average daily net assets of the fund were paid to FT Services. These fees
are paid by the manager. They are not a separate expense of the fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 PROBLEM. The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
<TABLE>
<CAPTION>
<S> <C>
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TAXATION OF THE FUND'S INVESTMENTS HOW DOES THE FUND EARN INCOME AND GAINS?
The fund invests your money in the stocks, The fund earns dividends and interest
bonds and other securities that are (the fund's "income") on its investments.
described in the section "How Does the When the fund sells a security for a
Fund Invest Its Assets?" Special tax rules price that is higher than it paid, it has
may apply in determining the income and a gain. When the fund sells a security
gains that the fund earns on its for a price that is lower than it paid,
investments. These rules may, in turn, it has a loss. If the fund has held the
affect the amount of distributions that security for more than one year, the gain
the fund pays to you. These special tax or loss will be a long-term capital gain
rules are discussed in the SAI. or loss. If the fund has held the
security for one year or less, the gain
TAXATION OF THE FUND. As a regulated or loss will be a short-term caital gain
investment company, the fund generally or loss. The fund's gains and losses are
pays no federal income tax on the income netted together, and, if the fund has a
and gains that it distributes to you. net gain (the fund's "gains"), that gain
will generally be distrbuted to you.
FOREIGN TAXES. Foreign governments may -------------------------------------------
impose taxes on the income and gains from the fund's investments in foreign
stocks and bonds. These taxes will reduce the amount of the fund's distributions
to you, but, depending upon the amount of the fund's assets that are invested in
foreign securities and foreign taxes paid, may be passed through to you as a
foreign tax credit on your income tax return. The fund may also invest in the
securities of foreign companies that are "passive foreign investment companies"
("PFICs"). These investments in PFICs may cause the fund to pay income taxes and
interest charges. If possible, the fund will adopt strategies to avoid PFIC
taxes and interest charges.
-------------------------------------------
WHAT IS A DISTRIBUTION?
TAXATION OF SHAREHOLDERS
As a shareholder, you will receive your
Distributions. Distributions from the share of the fund's income and gains on
fund, whether you receive them in cash or its investments in stocks, bonds and
in additional shares, are generally other securities. The fund's income and
subject to income tax. The fund will send short term capital gains are paid to you
you a statement in January of the current as ordinary dividends. The fund's
year that reflects the amount of ordinary long-term capital gains are paid to you
dividends, capital gain distributions and as capital gain distributions. If the
non-taxable distributions you received fund pays you an amount in excess of its
from the fund in the prior year. This income and gains, this excess will
statement will include distributions generally be treated as a non-taxable
declared in December and paid to you in distribution. These amounts, taken
January of the current year, but which are together, are what we call the fund's
taxable as if paid on December 31 of the distributions to you.
prior year.
-------------------------------------------
The IRS requires you to report these amounts on your income tax return for the
prior year.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a 401(k) plan or IRA, are generally tax-deferred; this
means that you are not required to report fund distributions on your income tax
return when paid to your plan, but, rather, when your plan makes payments to
you. Special rules apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the fund.
-------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem
your shares or if you exchange your shares WHAT IS A REDEMPTION?
in the fund for shares of another Franklin
Templeton Fund, you will generally have a A redemption is a sale by you to the fund
gain or loss that the IRS requires you to of some or all of your shares in the
report on your income tax return. If you fund. The price per share
exchange fund shares held for 90 days or you receive when you redeem fund shares
less and pay no sales charge, or a reduced may be more or less than the price at
sales charge, for the new shares, all or a which you purchased those shares. An
portion of the sales charge you paid on exchange of shares of the fund for shares
the purchase of the shares you exchanged of another Franklin Templeton Fund is
is not included in their cost for purposes treated as a redemption of fund shares
of computing gain or loss on the exchange. and then a purchase of shares of the
If you hold your shares for six months or other fund. When you redeem or exchange
less, any loss you have will be treated as your shares, you will generally have a
a long-term capital loss to the extent of gain or loss, depending upon whether the
any capital gain distributions received by amount you receive for your shares is
you from the fund. All or a portion of any more or less than your cost or other
loss on the redemption or exchange of your basis in the shares.
shares will be disallowed by the IRS if you -------------------------------------------
purchase other shares in the fund within
30 days before or after your redemption
or exchange.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the fund, and gains arising from redemptions or exchanges of your fund
shares will generally be subject to state and local income tax. The holding of
fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the fund.
-------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you
provide your taxpayer identification Backup withholding occurs when the fund
number ("TIN"), certify that it is is required to withhold and pay over to
correct, and certify that you are not the IRS 31% of your distributions and
subject to backup withholding under IRS redemption proceeds. You can avoid backup
rules. If you fail to provide a correct withholding by providing the fund with
TIN or the proper tax certifications, the your TIN, and by completing the tax
fund is required to withhold 31% of all certifications on your shareholder
the distributions (including ordinary application that you were asked to sign
dividends and capital gain distributions) when you opened your account. However, if
and redemption proceeds paid to you. The the IRS instructs the fund to begin
fund is also required to begin backup backup withholding, it is required to do
withholding on your account if the IRS so even if you provided the fund with
instructs the fund to do so. The fund your TIN and these tax certifications,
reserves the right not to open your and backup withholding will remain in
account, or, alternatively, to redeem your place until the fund is instructed by the
shares at the current net asset value, IRS that it is no longer required.
less any taxes withheld, if you fail to -------------------------------------------
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
</TABLE>
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THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI.
- --------------------------------------------------------------------------------
HOW IS THE TRUST ORGANIZED?
The fund is a non-diversified series of Franklin Strategic Series (the
"Trust")], [an] open-end management investment company, commonly called a
mutual fund. It was organized as a Delaware business trust on January 25,
1991, and is registered with the SEC. As of May 28, 1999, the fund began
offering a new class of shares designated Franklin Strategic Income Fund -
Advisor Class. All shares outstanding before the offering of Advisor Class
shares have been designated Franklin Strategic Income Fund - Class A,
Franklin Strategic Income Fund - Class B, and Franklin Strategic Income Fund
- - Class C. Additional series and classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the Board to consider the
removal of a Board member if requested in writing or by shareholders holding
at least 10% of the outstanding shares. In certain circumstances, we are
required to help you communicate with other shareholders about the removal of
a Board member. A special meeting may also be called by the Board in its
discretion.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the fund may be purchased without a sales charge. Please note that
as of January 1, 1998, shares of the fund are not available to retirement
plans through Franklin Templeton's ValuSelect(R) program. Retirement plans in
Franklin Templeton's ValuSelect program before January 1, 1998, however, may
continue to invest in the fund.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open your account: $5,000,000
o To add to your account: $50
We reserve the right to change the amount of these minimums from time
to time or to waive or lower these minimums for certain purchases.
Please see "Minimum Investments" below. We also reserve the right to
refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to receive
a wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day. If we
receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
MINIMUM INVESTMENTS
To determine if you meet the minimum initial investment requirement of $5
million, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. At least $1 million of this amount, however, must be invested in
Advisor Class or Class Z shares of any of the Franklin Templeton Funds.
The fund may waive or lower its minimum investment requirement for certain
purchases.
A lower minimum initial investment requirement applies to purchases by:
1. Qualified registered investment advisors or certified financial
planners who have clients invested in any series of Franklin Mutual
Series Fund Inc. on October 31, 1996, or who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors, subject to a $1,000 minimum initial and $50 minimum
subsequent investment requirement
2. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs, subject to a
$250,000 minimum initial investment requirement or a $100,000 minimum
initial investment requirement for an individual client
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate
family members, subject to a $100 minimum initial investment requirement
4. Each series of the Franklin Templeton Fund Allocator Series, subject to
a $1,000 minimum initial and subsequent investment requirement
5. Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code, subject
to a $1 million initial investment in Advisor Class or Class Z shares
of any of the Franklin Templeton Funds
No minimum initial investment requirement applies to purchases by:
1. Accounts managed by the Franklin Templeton Group
2. The Franklin Templeton Profit Sharing 401(k) Plan
3. Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
Section 401 of the Code, including salary reduction plans qualified
under Section 401(k) of the Code, and that are sponsored by an employer
(i) with at least 10,000 employees, or (ii) with retirement plan assets
of $100 million or more
4. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion
5. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if
the group as a whole meets the $5 million minimum investment
requirement. A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Trust Company can
provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. These plans require separate applications and their policies
and procedures may be different from those described in the prospectus. For
more information, including a free retirement plan brochure or application,
please call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors
or one of its affiliates and not by the fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer
Advisor Class shares.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services
_ If you do not want the ability to exchange by
phone to apply to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you are
exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the SAME CLASS, except as noted below.
o Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature guarantee.
You may, however, exchange shares from a fund account requiring two or more
signatures into a an identically registered money fund account requiring
only one signature for all transactions. PLEASE NOTIFY US IN WRITING IF YOU
DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional
procedures may apply. Please see "Transaction Procedures and Special
Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class A shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton
Growth Fund, you may exchange the Advisor Class shares you own for Class A
shares of those funds or of Templeton Institutional Funds, Inc. at Net Asset
Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class A shares for
Advisor Class shares of that fund. You may also exchange your Advisor Class
shares for Class Z shares of Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the bank
where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts under
court jurisdiction may have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $100,000 or less.
Institutional accounts may exceed $100,000 by
completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have already
returned them to the fund
o Unless the address on your account was changed
by phone within the last 15 days
_ If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund intends to pay a dividend at least monthly, on or about the 15th day
of the month, representing its net investment income. Capital gains, if any,
may be distributed annually. The amount of these distributions will vary and
there is no guarantee the fund will pay dividends. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its
shares.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of
the SAME CLASS of the fund by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You also may direct your distributions to buy Class A shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments. Please note that distributions may only be
directed to an existing account.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking or savings account, you may need a
signature guarantee. If you send the money to a checking or savings account,
please see "Electronic Fund Transfers" under "Services to Help You Manage
Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The
Net Asset Value we use when you buy or sell shares is the one next calculated
after we receive your transaction request in proper form. If you buy or sell
shares through your Securities Dealer, however, we will use the Net Asset
Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time. You can find the prior day's closing Net Asset Value in many newspapers.
The Net Asset Value of all outstanding shares of each Class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. To calculate
Net Asset Value per share of each class, the assets of each class are valued
and totaled, liabilities are subtracted, and the balance, called net assets,
is divided by the number of shares of the class outstanding. The fund's
assets are valued as described under "How Are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, the fund
accepts written instructions signed by only one owner for transactions or
account changes that could otherwise be made by phone. For all other of
transactions and changes, all registered owners must sign the instructions.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $100,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
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TYPE OF ACCOUNT DOCUMENTS REQUIRED
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CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
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TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50
for employee accounts. We will only do this if the value of your account fell
below this amount because you voluntarily sold your shares and your account
has been inactive (except for the reinvestment of distributions) for at least
six months. Before we close your account, we will notify you and give you 30
days to increase the value of your account to $1,000, or $100 for employee
accounts. These minimums do not apply to IRAs, accounts managed by the
Franklin Templeton Group, the Franklin Templeton Profit Sharing 401(k) Plan,
the series of Franklin Templeton Fund Allocator Series, or certain defined
contribution plans that qualify to buy shares with no minimum initial
investment requirement.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking or savings account to the fund each month to buy additional shares.
If you are interested in this program, please refer to the shareholder
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by calling
Shareholder Services.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. Once your plan is established, any distributions paid
by the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price information about any Franklin Templeton Fund; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the fund's code number to use TeleFACTS(R). The fund's code
number is 694.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and the manager are also located at this
address. The sub-advisor is located at Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida 33394-3091. You may also contact us by phone at one
of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS A, CLASS B, CLASS C AND ADVISOR CLASS - The fund offers four classes of
shares, designated "Class A," "Class B," "Class C," and "Advisor Class." The
four classes have proportionate interests in the fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC INCOME FUND - ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
May 28, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?.........................
What Are the Risks of Investing in the Fund?.................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management
and Other Services..........................................
How Does the Fund Buy
Securities for Its Portfolio?...............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Fund's Underwriter.......................................
How Does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
Description of Ratings......................................
- -----------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with
capital letters. This means the term is explained under "Useful
Terms and Definitions."
- -----------------------------------------------------------------------
The fund is a non-diversified series of Franklin Strategic Series (the
"Trust"), an open-end management investment company. The Prospectus, dated
May 28, 1999, which we may amend from time to time, contains the basic
information you should know before investing in the fund. For a free copy,
call 1-800/DIAL BEN.
This SAI describes the fund's Advisor Class shares. The fund currently offers
other share classes with different sales charge and expense structures, which
affect performance. To receive more information about the fund's other share
classes, contact your investment representative or call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The primary investment goal of the fund is to obtain a high level of current
income, with capital appreciation over the long term as a secondary goal.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?"
in the Prospectus.
MORE INFORMATION ABOUT THE
KINDS OF SECURITIES THE FUND BUYS
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain period of time. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividends to holders of its equity securities. Bonds,
notes, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
these securities generally declines. These changes in market value will be
reflected in the fund's Net Asset Value.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed-upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to
repurchase at not less than their repurchase price. Advisers will monitor the
value of such securities daily to determine that the value equals or exceeds
the repurchase price. Repurchase agreements may involve risks in the event of
default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to dispose of the underlying securities.
The fund will enter into repurchase agreements only with parties who meet the
creditworthiness standards approved by the Board, i.e. banks or broker
dealers which have been determined by Advisers to present no serious risk of
becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to one-third of its
total assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to have voting rights with respect to the
securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower
fail.
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. Nonetheless, because FNMA and FHLMC are instrumentalities of the
U.S. government, these securities are generally considered to be high quality
investments having minimal credit risks.
Most mortgage 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 these factors, the ability
of the fund to obtain a high level of total return may be limited under
varying market conditions.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES ("GNMAS"). GNMAs are
mortgage backed securities representing part ownership of a pool of mortgage
loans. GNMAs differ from bonds in that principal is scheduled to be paid back
by the borrower over the length of the loan rather than returned in a lump
sum at maturity. The fund may buy GNMAs for which principal and interest are
guaranteed. The fund may also buy "variable rate" GNMAs and may buy other
types that may be issued with the guarantee of the Government National
Mortgage Association ("GNMA").
The GNMA guarantee of principal and interest on GNMAs is backed by the full
faith and credit of the U.S. government. However, these securities do involve
certain risks. For example, when mortgages in the pool underlying GNMAs are
prepaid, the principal payments are passed through to the certificate holders
(such as the fund). Scheduled and unscheduled prepayments of principal may
greatly change realized yields. In a period of declining interest rates it is
more likely that mortgages contained in GNMA pools will be prepaid thus
reducing the effective yield. Moreover, any premium paid on the purchase of
GNMAs will be lost if the obligation is prepaid. In periods of falling
interest rates, this potential for pre-payment may reduce the general upward
price increase of GNMAs, which might otherwise occur. As with other debt
instruments, the price of GNMAs is likely to decrease in times of rising
interest rates. Price changes of GNMAs held by the fund have a direct impact
on the Net Asset Value per share of the fund.
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.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower current yields. Because of this
feature, the value of an ARM is unlikely to rise during periods of declining
interest rates to the same extent as a fixed-rate instrument. The rate of
amortization of principal, as well as interest payments, for certain types of
ARMs change in accordance with movements in a pre-specified, published
interest rate index. There are several categories of indices, including those
based on U.S. Treasury securities, those derived from a calculated measure,
such as a cost of funds index, or a moving average of mortgage rates and
actual market rates. The amount of interest due to an ARM security holder is
calculated by adding a specified additional amount, the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest
that is charged to the mortgagor during the life of the mortgage or to
maximum and minimum changes to that interest rate during a given period. The
interest rates paid on the ARMs in which the fund may invest are generally
readjusted at intervals of one year or less, although instruments with longer
resets such as three years and five years are also permissible investments.
The underlying mortgages that collateralize the ARMs in which the fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes
in the borrower's monthly principal and interest payments rather than
limiting interest rate changes. These payment caps may result in negative
amortization, which can extend the average life of the securities. Since most
ARMs in the fund's portfolio will generally have annual reset limits or caps
of 100 to 200 basis points, fluctuations in interest rates above these levels
could cause the mortgage securities to "cap out" and to behave more like
long-term, fixed-rate debt securities.
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 or 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 stripped mortgage securities. Accordingly, some of these securities
may be illiquid. The staff of the SEC has indicated that only
government-issued IO or PO securities that are backed by fixed-rate mortgages
may be deemed to be liquid, if procedures with respect to determining
liquidity are established by a fund's board. The Board may, in the future,
adopt procedures that would permit the fund to acquire, hold, and treat as
liquid government-issued IO and PO securities. At the present time, however,
all such securities will continue to be treated as illiquid and will,
together with any other illiquid investments, not exceed 10% of the fund's
net assets. This position may be changed in the future, without notice to
shareholders, in response to the staff's continued reassessment of this
matter, as well as to changing market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS"), AND MULTI-CLASS PASS-THROUGHS. The fund may invest in
certain debt obligations that are collateralized by mortgage loans or
mortgage pass-through securities. These obligations may be issued or
guaranteed by U.S. government agencies or issued by certain financial
institutions and other mortgage lenders. CMOs and REMICs are debt instruments
issued by special purpose entities and are secured by pools of mortgages
backed by residential and various types of commercial properties. Multi-class
pass-through securities are equity interests in a trust composed of mortgage
loans or other mortgage-backed securities. Payments of principal and interest
on the underlying collateral provides the funds to pay debt service on the
CMO or REMIC or make scheduled distributions on the multi-class pass-through
securities.
CMOs are fixed-income securities that 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.
The underlying mortgages are backed by residential and various types of
commercial properties. 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 that are rated in any category by the rating agencies without
insurance or guarantee if, in the opinion of Advisers, 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 these circumstances, the
reinvestment of prepayments will generally be at a rate lower than the rate
applicable to the original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a
specified coupon rate or adjustable rate and has a stated maturity or final
distribution date. Principal prepayments on collateral underlying a CMO,
however, may cause it to be retired substantially earlier than the stated
maturities or final distribution dates. Interest is paid or accrues on all
classes of a CMO on a monthly, quarterly or semiannual basis. The principal
and interest on the underlying mortgages may be allocated among several
classes of a series in many ways. In a common structure, payments of
principal, including any principal prepayments, on the underlying mortgages
are applied to the classes of a series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment
of principal will be made on any class of a CMO until all other classes
having an earlier stated maturity or final distribution date have been paid
in full.
To the extent any privately issued CMOs in which the fund invests are
considered by the SEC to be an investment company, the fund will limit its
investments in such securities in a manner consistent with the provisions of
the 1940 Act.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured
by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. As with CMOs, the mortgages that
collateralize the REMICs in which the fund may invest include mortgages
backed by GNMAs or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities or issued by private
entities, which are not guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields
on CMOs issued or guaranteed by U.S. government agencies. However, the risk
of loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government. The Board believes that accepting the risk
of loss relating to privately issued CMOs that the fund acquires is justified
by the higher yield the fund will earn in light of the historic loss
experience on such instruments.
As new types of mortgage securities are developed and offered to investors,
the fund may invest in them if they are consistent with the fund's
objectives, policies, and quality standards.
ASSET-BACKED SECURITIES. The fund may invest in various asset-backed
securities rated in any category by the rating agencies. 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.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, a convertible security is not
as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security. However, if
the parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a foreign
correspondent bank. The fund may invest in sponsored and unsponsored ADRs.
Prices of ADRs are quoted in U.S. dollars. They are traded in the U.S. on
exchanges or over-the-counter and are sponsored and issued by domestic banks.
ADRs do not eliminate all of the risk inherent in investing in the securities
of foreign issuers. To the extent that the fund acquires ADRs through banks
that do not have a contractual relationship with the foreign issuer of the
security underlying the ADR to issue and service the ADRs, there may be an
increased possibility that the fund would not become aware of and be able to
respond to corporate actions such as stock splits or rights offerings
involving the foreign issuer in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such
instruments. To the extent the fund invests in ADRs rather than directly in
the stock of foreign issuers, it will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a
large, liquid market in the U.S. for ADRs quoted on a national securities
exchange or the NASDAQ National Market System. The information available for
ADRs is subject to the accounting, auditing, and financial reporting
standards of the domestic market or exchange on which they are traded. These
standards are more uniform and more exacting than those to which many foreign
issuers may be subject.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. The fund may buy U.S.
government obligations on a "when issued" or "delayed delivery" basis. These
transactions are arrangements under which the fund buys securities that have
been authorized but not yet issued with payment for and delivery of the
security scheduled for a future time, generally in 30 to 60 days. Purchases
of U.S. government securities on a when issued or delayed delivery basis are
subject to the risk that the value or yields at delivery may be more or less
than the purchase price or the yields available when the transaction was
entered into. Although the fund will generally buy U.S. government securities
on a when issued basis with the intention of holding the securities, it may
sell the securities before the settlement date if it is deemed advisable.
When the fund is the buyer in this type of transaction, it will maintain, in
a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of the fund's
purchase commitments until payment is made. To the extent the fund engages in
when issued and delayed delivery transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with its investment
objectives and policies, and not for the purpose of investment leverage. In
when issued and delayed delivery transactions, the fund relies on the seller
to complete the transaction. The seller's failure to do so may cause the fund
to miss a price or yield considered advantageous to the fund. Securities
purchased on a when issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. Entering into a when issued or
delayed delivery transaction is a form of leverage that may affect changes in
Net Asset Value to a greater extent.
MORTGAGE DOLLAR ROLLS. The fund may enter into mortgage dollar rolls in which
the fund sells mortgage-backed securities for delivery in the current month
and simultaneously contracts to repurchase substantially similar (name, type,
coupon, and maturity) securities on a specified future date. During the
period between the sale and repurchase, the fund forgoes principal and
interest paid on the mortgage-backed securities. The fund is compensated by
the difference between the current sale price and the lower price for the
future purchase (often referred to as the "drop"), as well as by the interest
earned on the cash proceeds of the initial sale. A "covered roll" is a
specific type of mortgage dollar roll for which there is an offsetting cash
position or a cash equivalent security position. The fund could suffer a loss
if the contracting party fails to perform the future transaction in that the
fund may not be able to buy back the mortgage-backed securities it initially
sold. The fund intends to enter into mortgage dollar rolls only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
CALL AND PUT OPTIONS ON SECURITIES. As noted in the Prospectus, the fund
intends to write (sell) covered put and call options and buy put and call
options that trade on securities exchanges and in the over-the-counter market.
WRITING CALL OPTIONS. Call options written by the fund give the holder the
right to buy the underlying securities from the fund at a stated exercise
price; put options written by the fund give the holder the right to sell the
underlying security to the fund at a stated exercise price. A call option
written by the fund is "covered" if the fund owns the underlying security
which is subject to the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call written if the
difference is maintained by the fund in cash and high grade debt securities
in a segregated account with its custodian bank. The premium paid by the
buyer of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand, and interest rates.
In the case of a call option, the writer of an option may have no control
over when the underlying securities must be sold, in the case of a call
option, since, with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains the amount
of the premium. This amount may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit
or loss from the sale of the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be cancelled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. In addition,
effecting a closing transaction will permit the cash or proceeds from the
sale of any securities subject to the option to be used for other fund
investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to buy the option; the fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
buy the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the underlying security owned
by the fund.
BUYING CALL OPTIONS. The fund may buy call options on securities that it
intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The fund may also buy call options on
securities held in its portfolio and on which it has written call options. A
call option gives the holder the right to buy the underlying securities from
the option writer at a stated exercise price. Prior to its expiration, a call
option may be sold in a closing sale transaction. Profit or loss from such a
sale will depend on whether the amount received is more or less than the
premium paid for the call option plus the related transaction costs.
WRITING PUT OPTIONS. Although the fund has no current intention of writing
covered put options, the fund reserves the right to do so.
A put option gives the buyer of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any
time prior to its expiration date. The operation of put options in other
respects, including their related risks and rewards, is substantially
identical to that of call options.
The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding. The
rules of the clearing corporation currently require that the assets be
deposited in escrow to secure payment of the exercise price. The fund would
generally write covered put options in circumstances where Advisers wishes to
buy the underlying security or currency for the fund's portfolio at a price
lower than the current market price of the security or currency. In such
event, the fund would write a put option at an exercise price which, reduced
by the premium received on the option, reflects the lower price it is willing
to pay. Since the fund would also receive interest on debt securities or
currencies maintained to cover the exercise price of the option, this
technique could be used to enhance current return during periods of market
uncertainty. The risk in this type of transaction would be that the market
price of the underlying security or currency would decline below the exercise
price less the premiums received.
BUYING PUT OPTIONS. The fund may buy put options. As the holder of a put
option, the fund has the right to sell the underlying security or currency at
the exercise price at any time during the option period. The fund may enter
into closing sale transactions with respect to put options, exercise them, or
permit them to expire.
The fund may buy a put option on an underlying security or currency owned by
the fund (a "protective put") as a hedging technique in order to protect
against an anticipated decline in the value of the security or currency. This
hedge protection is provided only during the life of the put option when the
fund, as the holder of the put option, is able to sell the underlying
security or currency at the put exercise price, regardless of any decline in
the underlying security's market price or currency's exchange value. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security or currency when the manager deems it desirable to
continue to hold the security or currency because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security or
currency is eventually sold.
The fund may also buy put options at a time when the fund does not own the
underlying security or currency. By buying put options on a security or
currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The fund will commit no more than 5% of its assets to premiums when buying
put options. The premium paid by the fund when buying a put option will be
recorded as an asset in the fund's statement of assets and liabilities. This
asset will be adjusted daily to the options' current market value, which will
be the latest sale price at the time at which the Net Asset Value per share
of the fund is computed, the close of the NYSE, or, in the absence of a sale,
the latest bid price. The asset will be extinguished upon expiration of the
option, the writing of an identical option in a closing transaction, or the
delivery of the underlying security or currency upon the exercise of the
option.
OVER-THE-COUNTER OPTIONS ("OTC" OPTIONS). The fund intends to write covered
put and call options and buy put and call options that trade in the
over-the-counter market to the same extent that it will engage in exchange
traded options. Just as with exchange traded options, OTC call options give
the option holder the right to buy an underlying security from an option
writer at a stated exercise price; OTC put options give the holder the right
to sell an underlying security to an option writer at a stated exercise
price. However, OTC options differ from exchange traded options in certain
material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange traded options;
and the writer of an OTC option is paid the premium in advance by the dealer.
OPTIONS ON STOCK INDICES. The fund may also buy call and put options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to
options on securities except that, rather than the right to buy or sell stock
at a specified price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level
of the underlying stock index is greater than (or less than, in the case of
puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the option, expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends
on price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or high quality fixed-income securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index and will maintain the account while the option is
open or it will otherwise cover the transaction.
OPTIONS ON FOREIGN CURRENCIES. The fund may buy and write (sell) put and call
options on foreign currencies traded on U.S. exchanges or in the
over-the-counter markets. Like other kinds of options, the writing of an
option on foreign currency will be only a partial hedge, up to the amount of
the premium received, and the fund could be required to buy or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may be an effective hedge against
fluctuations in exchange rates although, in the event of rate movements
adverse to the fund's position, the fund may forfeit the entire amount of the
premium plus related transaction costs.
FUTURES CONTRACTS. The fund may enter into contracts for the purchase or sale
for future delivery of securities and in such contracts based upon financial
indices ("financial futures"). Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of
a specified quantity of a financial instrument, such as a security, or the
cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver the securities called for by the contract
at a specified price on a specified date. A "purchase" of a futures contract
means the acquisition of a contractual obligation to acquire the securities
called for by the contract at a specified price on a specified date. Futures
contracts have been designed by exchanges that have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC") and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market.
At the same time a futures contract is purchased or sold, the fund must
allocate cash or securities as a deposit payment ("initial deposit" or
"initial margin") as a partial guarantee of its performance under the
contract. Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required since each day the fund would provide or
receive cash that reflects any decline or increase in the contract's value.
In addition, when the fund enters into a futures contract, it will segregate
assets or "cover" its position in accordance with the 1940 Act.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an exchange,
cancels the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset, or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the fund will incur brokerage fees when it buys or sells futures contracts.
The fund will not engage in transactions in futures contracts or related
options for speculation but only as a hedge against changes resulting from
market conditions in the values of its securities or securities it intends to
buy. The fund will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one-third of
the fund's net assets would be represented by futures contracts or related
options. In addition, the fund may not buy or sell futures contracts or
related options if, immediately thereafter, the sum of the amount of margin
deposits on its existing futures and related options positions and premiums
paid for related options would exceed 5% of the market value of the fund's
total assets. In instances involving the purchase of futures contracts or
related call options, money market instruments equal to the market value of
the futures contract or related option will be deposited in a segregated
account with the custodian to collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the fund from fluctuations in the price of portfolio securities
without actually buying or selling the underlying security. To the extent the
fund enters into a futures contract, it will maintain with its custodian
bank, to the extent required by SEC rules, assets in a segregated account to
cover its obligations with respect to the contract which will consist of
cash, cash equivalents, or high quality debt securities from its portfolio in
an amount equal to the difference between the fluctuating market value of
such futures contract and the aggregate value of the initial and variation
margin payments made by the fund with respect to such futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at
the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index
is made.
The fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of its
equity securities that might otherwise result. When the fund is not fully
invested in stocks and anticipates a significant market advance, it may buy
stock index futures in order to gain rapid market exposure that may in part
or entirely offset increases in the cost of common stocks that it intends to
buy.
OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put
options on stock index futures to hedge against risks of market-side price
movements. The need to hedge against such risks will depend on the extent of
diversification of the fund's common stock portfolio and the sensitivity of
such investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to
correlate with price movements in certain categories of debt securities. The
fund's investment strategy in employing futures contracts based on an index
of debt securities will be similar to that used by it in other financial
futures transactions. The fund may also buy and write put and call options on
such index futures and enter into closing transactions with respect to such
options.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any
other derivative investments which are not presently contemplated for use by
the fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with the fund's investment
objectives and legally permissible for the fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. The fund may enter into forward currency
exchange contracts ("Forward Contract(s)") to attempt to minimize the risk to
the fund from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to buy or sell a specific
currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers.
The fund may construct an investment position by combining a debt security
denominated in one currency with a Forward Contract calling for the exchange
of that currency for another currency. The investment position is not itself
a security but is a combined position (i.e., a debt security coupled with a
Forward Contract) that is intended to be similar in overall performance to a
debt security denominated in the same currency.
For example, an Italian lira-denominated position could be constructed by
buying a German mark-denominated debt security and simultaneously entering
into a Forward Contract to exchange an equal amount of marks for lira at a
future date and at a specified exchange rate. With such a transaction, the
fund may be able to receive a return that is substantially similar from a
yield and currency perspective to a direct investment in lira debt securities
while achieving other benefits from holding the underlying security. The fund
may experience slightly different results from its use of such combined
investment positions as compared to its purchase of a debt security
denominated in the particular currency subject to the Forward Contract. This
difference may be enhanced or offset by premiums that may be available in
connection with the Forward Contract.
The fund may also enter into a Forward Contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of that
security. Additionally, for example, when the fund believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may
enter into a Forward Contract to sell an amount of that foreign currency
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency; or when the fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may
enter into a Forward Contract to buy that foreign currency for a fixed dollar
amount.
The fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents, or readily marketable debt
securities equal to the amount of the purchase will be held in segregated
accounts with the fund's custodian bank to be used to pay for the commitment,
or the fund will cover any commitments under these contracts to sell currency
by owning the underlying currency (or an absolute right to acquire such
currency). The segregated account will be marked-to-market daily. The ability
of the fund to enter into Forward Contracts is limited only to the extent
such Forward Contracts would, in the opinion of the manager, impede portfolio
management or the ability of the fund to honor redemption requests.
INTEREST RATE AND CURRENCY SWAPS. An interest rate swap is the transfer
between two counterparties of interest rate obligations, one of which has an
interest rate fixed to maturity while the other has an interest rate that
changes in accordance with changes in a designated benchmark (e.g., LIBOR,
prime, commercial paper, or other benchmarks). The obligations to make
repayment of principal on the underlying securities are not exchanged. These
transactions generally require the participation of an intermediary,
frequently a bank. The entity holding the fixed-rate obligation will transfer
the obligation to the intermediary, and that entity will then be obligated to
pay to the intermediary a floating rate of interest, generally including a
fractional percentage as a commission for the intermediary. The intermediary
also makes arrangements with a second entity that has a floating-rate
obligation which substantially mirrors the obligation desired by the first
party. In return for assuming a fixed obligation, the second entity will pay
the intermediary all sums that the intermediary pays on behalf of the first
entity, plus an arrangement fee and other agreed upon fees. Interest rate
swaps are generally entered into to permit the party seeking a floating rate
obligation the opportunity to acquire such obligation at a lower rate than is
directly available in the credit market, while permitting the party desiring
a fixed-rate obligation the opportunity to acquire such a fixed-rate
obligation, also frequently at a price lower than is available in the credit
markets. The success of such a transaction depends in large part on the
availability of fixed-rate obligations at a low enough coupon rate to cover
the cost involved.
The fund will only enter into interest rate swaps on a net basis, which means
that the two payment streams are netted out, with the fund receiving or
paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets
or principal. Accordingly, the risk of loss with respect to interest rate
swaps is limited to the net amount of interest payments that the fund is
contractually obligated to make. If the other party to an interest rate swap
defaults, the fund's risk of loss consists of the net amount of interest
payments that the fund is contractually entitled to receive. In contrast,
currency swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the
risk that the other party to the swap will default on its contractual
delivery obligations.
ILLIQUID SECURITIES. As noted in the Prospectus, it is the policy of the fund
that illiquid securities (including illiquid equity securities, defaulted
debt securities, loan participations, securities with legal or contractual
restrictions on resale, repurchase agreements of more than seven days
duration, and other securities which are not readily marketable) may not
constitute more than 10% of the value of the fund's total net assets.
Generally, an "illiquid security" is any security that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount
at which the fund has valued the instrument. Subject to this limitation, the
Board has authorized the fund to invest in restricted securities where such
investment is consistent with the fund's investment objectives and has
authorized such securities to be considered liquid to the extent the manager
determines that there is a liquid institutional or other market for such
securities - such as, restricted securities which may be freely transferred
among qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, and for which a liquid institutional
market has developed. The Board will review on a monthly basis any
determination by the manager to treat a restricted security as liquid,
including the manager's assessment of current trading activity and the
availability of reliable price information. In determining whether a
restricted security is properly considered a liquid security, the manager and
the Board will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to buy
or sell the security and the number of other potential buyers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the fund invests in restricted securities that
are deemed liquid, the general level of illiquidity may be increased if
qualified institutional buyers become uninterested in buying these securities
or the market for these securities contracts.
A restricted security is a security that has been purchased through a private
offering and cannot be sold without prior registration under the Securities
Act of 1933 unless the sale is pursuant to an exemption therefrom.
Notwithstanding the restriction on the sale of such securities, a secondary
market exists for many of these securities. As with other securities in the
fund's portfolio, if there are readily available market quotations for a
restricted security, it will be valued, for purposes of determining the
fund's Net Asset Value, between the range of the bid and ask prices. To the
extent that no quotations are available, the securities will be valued at
fair value in accordance with procedures adopted by the Board.
The fund's purchases of restricted securities can result in the receipt of
commitment fees. For example, the transaction may involve an individually
negotiated purchase of short-term increasing rate notes. Maturities for this
type of security typically range from one to five years. These notes are
usually issued as temporary or "bridge" financing to be replaced ultimately
with permanent financing for the project or transaction which the issuer
seeks to finance. Typically, at the time of commitment, the fund receives the
security and sometimes a cash commitment fee. Because the transaction could
possibly involve a delay between the time the fund commits to buy the
security and the fund's payment for and receipt of that security, the fund
will maintain, in a segregated account with its custodian bank, cash or
high-grade marketable securities having an aggregate value equal to the
amount of the purchase commitments until payment is made. The fund will not
buy restricted securities in order to generate commitment fees, although the
receipt of such fees will assist the fund in achieving its principal
objective of earning a high level of current income.
Notwithstanding the determinations in regard to the liquidity of restricted
securities, the Board remains responsible for such determinations and will
consider appropriate action to maximize the fund's liquidity and its ability
to meet redemption demands if a security should become illiquid after its
purchase. To the extent the fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may be increased
if qualified institutional buyers become uninterested in buying these
securities or the market for these securities contracts.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
HIGH YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which the fund invests. Accordingly, an investment in the fund should not be
considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's Net Asset Value. Defaulted securities
tend to lose much of their value before they default. Thus, the fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for the fund. The premature disposition of a
high yield security due to a call or buy-back feature, the deterioration of
an issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income. Under the Code and
U.S. Treasury regulations, the fund may have to accrue income on defaulted
securities and distribute the income to shareholders for tax purposes, even
though the fund is not currently receiving interest or principal payments on
the defaulted securities. To generate cash to satisfy these distribution
requirements, the fund may have to sell portfolio securities that it
otherwise may have continued to hold or use cash flows from other sources,
such as the sale of fund shares.
Lower quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on the fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
The fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants, and penalty provisions for delayed
registration, if the fund is required to sell restricted securities before
the securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. The fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's Net Asset Value.
The fund relies on the manager's judgment, analysis, and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
takes into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management, and regulatory matters.
MORTGAGE-BACKED SECURITIES. To the extent mortgage securities are purchased
at a premium, unscheduled principal prepayments, including prepayments
resulting from mortgage foreclosures, may result in some loss of the holder's
principal investment to the extent of the premium paid. On the other hand, if
mortgage securities are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will increase current
and total returns and will accelerate the recognition of income which, when
distributed to you, will be taxable as ordinary income.
Some of the CMOs in which the fund may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs
could result in the fund's inability to dispose of such securities at an
advantageous price under certain circumstances.
FOREIGN SECURITIES. You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its Net Asset Value. Foreign markets
have substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers, and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's
system of share registration and custody; (b) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce
a judgment; (c) pervasiveness of corruption, insider trading, and crime in
the Russian economic system; (d) currency exchange rate volatility and the
lack of available currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (f) controls on foreign investment and local practices
disfavoring foreign investors and limitations on repatriation of invested
capital, profits, and dividends, and on the fund's ability to exchange local
currencies for U.S. dollars; (g) the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support
the economic reform programs implemented since the dissolution of the Soviet
Union and could follow radically different political and/or economic policies
to the detriment of investors, including non-market-oriented policies such as
the support of certain industries at the expense of other sectors or
investors, a return to the centrally planned economy that existed prior to
the dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalization,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many
Russian securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including
large amounts of inter-company debt which may create a payments crisis on a
national scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or,
in the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by the fund due to
the underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in
certain industries, thereby limiting the number of investment opportunities
in Russia; (o) the risk that pending legislation would confer to Russian
courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes
before an internationally-accepted third-country arbitrator; and (p) the
difficulty in obtaining information about the financial condition of Russian
issuers, in light of the different disclosure and accounting standards
applicable to Russian companies.
There is little long-term historical data on Russian securities markets
because they are relatively new, and a substantial proportion of securities
transactions in Russia is privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems,
settlement, clearing, and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced
by extracts from the register or by formal share certificates. However, there
is no central registration system for shareholders, and these services are
carried out by the companies themselves or by registrars located throughout
Russia. These registrars are not necessarily subject to effective state
supervision, nor are they licensed with any governmental entity, and it is
possible for the fund to lose its registration through fraud, negligence, or
even mere oversight. While the fund will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian
or other agent inspecting the share register and by obtaining extracts of
share registers through regular confirmations, these extracts have no legal
enforceability, and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian regulations
impose liability on registrars for losses resulting from their errors, it may
be difficult for the fund to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more
than 500 shareholders is required by law to contract out the maintenance of
its shareholder register to an independent entity that meets certain
criteria, in practice this regulation has not always been strictly enforced.
Because of this lack of independence, management of a company may be able to
exert considerable influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to record
transactions in the share register. In addition, so-called
"financial-industrial groups" have emerged in recent years that seek to deter
outside investors from interfering in the management of companies they
control. These practices may prevent the fund from investing in the
securities of certain Russian companies deemed suitable by the manager.
Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which
may expose the fund to potential loss on the investment.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent the
fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Board also considers the
degree of risk involved through the holding of portfolio securities in
domestic and foreign securities depositories. However, in the absence of
willful misfeasance, bad faith, or gross negligence on the part of the
manager, any losses resulting from the holding of the fund's portfolio
securities in foreign countries and/or with securities depositories will be
at the risk of the shareholders. No assurance can be given that the Board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
STOCK INDEX OPTIONS, STOCK INDEX FUTURES, FINANCIAL FUTURES, AND RELATED
OPTIONS. The fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indexes, stock index
futures, financial futures, and related options depends on the degree to
which price movements in the underlying index or underlying securities
correlate with price movements in the relevant portion of the fund's
portfolio. Inasmuch as these securities will not duplicate the components of
any index or underlying securities, the correlation will not be perfect.
Consequently, the fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both the securities and the hedging instrument.
Accordingly, successful use by the fund of options on stock indexes, stock
index futures, financial futures, and related options will be subject to the
manager's ability to predict correctly movements in the direction of the
securities markets generally or of a particular segment. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Positions in stock index options, stock index futures, and financial futures,
and related options may be closed out only on an exchange that provides a
secondary market. There can be no assurance that a liquid secondary market
will exist for any particular stock index option or futures contract or
related option at any specific time. Thus, it may not be possible to close an
option or futures position. The inability to close options or futures
positions could have an adverse impact on the fund's ability to effectively
hedge its securities. The fund will enter into an option or futures position
only if there appears to be a liquid secondary market for such options or
futures.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only
by exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the fund writes an OTC option, it generally
can close out that option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the fund originally
wrote it. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires
or the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for
other investment purposes while it is obligated as a put writer. Similarly, a
buyer of such put or call option might also find it difficult to terminate
its position on a timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
that any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The fund does not believe that these trading and
positions limits will have an adverse impact on the fund's strategies for
hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the fund believes that
use of such contracts will benefit the fund, if the manager's investment
judgment about the general direction of interest rates is incorrect, the
fund's overall performance would be poorer than if it had not entered into
any such contract. For example, if the fund has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of bonds held in its portfolio and interest rates decrease instead, the
fund will lose part or all of the benefit of the increased value of its bonds
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the fund has insufficient
cash, it may have to sell securities from its portfolio to meet daily
variation margin requirements. These sales may be, but will not necessarily
be, at increased prices which reflect the rising market. The fund may have to
sell securities at a time when it may be disadvantageous to do so.
The fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in
value. The fund expects that in the normal course it will buy securities upon
termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of such
positions without a corresponding purchase of securities.
FORWARD CURRENCY CONTRACTS. As noted above, the fund may enter into forward
currency contracts, in part in order to limit the risk from adverse changes
in the relationship between currencies. However, Forward Contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies or between foreign currencies. Unanticipated
changes in currency exchange rates also may result in poorer overall
performance for the fund than if it had not entered into such contracts.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the fund or
(ii) 67% or more of the shares of the fund present at a shareholder meeting
if more than 50% of the outstanding shares of the fund are represented at the
meeting in person or by proxy, whichever is less. The fund MAY NOT:
(1) Invest more than 25% of the value of the fund's total assets in one
particular industry; except that, to the extent this restriction is
applicable, all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
objective and policies as the fund;
(2) Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter in connection with the disposition of
securities in its portfolio; except that all or substantially all of the
assets of the fund may be invested in another registered investment company
having the same investment objectives and policies as the fund;
(3) Make loans to other persons except on a temporary basis in connection
with the delivery or receipt of portfolio securities which have been bought
or sold, or by the purchase of bonds, debentures or similar obligations which
have been publicly distributed or of a character usually acquired by
institutional investors or through loans of the fund's portfolio securities,
or to the extent the entry into a repurchase agreement may be deemed a loan;
(4) Borrow money in excess of 5% of the value of the fund's total assets, and
then only as a temporary measure for extraordinary or emergency purposes;
(5) Sell securities short or buy on margin nor pledge or hypothecate any of
the fund's assets; except that the fund may enter into financial futures and
options on financial futures as discussed;
(6) Buy or sell real estate (other than interests in real estate investment
trusts), commodities or commodity contracts; except that the fund may invest
in financial futures and related options on futures with respect to
securities, securities indices and currencies;
(7) Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition; provided that all or substantially all of the assets of the fund
may be invested in another registered investment company having the same
investment objective and policies as the fund. To the extent permitted by
exemptions granted under the 1940 Act, the fund may invest in shares of one
or more money market funds managed by the manager or its affiliates;
(8) Invest in securities for the purpose of exercising management or control
of the issuer, except that, to the extent this restriction is applicable, all
or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and
policies as the fund; and
(9) Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if, to the
knowledge of the fund, one or more of the officers or trustees of the fund,
or its investment adviser, own beneficially more than one-half of 1% of the
securities of such issuer and all such officers and trustees together own
beneficially more than 5% of such securities, except that, to the extent this
restriction is applicable, all or substantially all of the assets of the fund
may be invested in another registered investment company having the same
investment objective and policies as the fund, or except as permitted under
investment restriction Number 7 regarding the purchase of shares of money
market funds managed by the manager or its affiliates.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the
fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below.
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE
YEARS
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 25 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), National Child Research Center, Assistant to the
President of the United States and Secretary of the Cabinet (1990-1993),
General Counsel to the United States Treasury Department (1989-1990), and
Counselor to the Secretary and Assistant Secretary for Public Affairs and
Public Liaison-United States Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 50 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (38)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLL and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (42)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 34 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
* This Board member is considered an "interested person" under the 1940 Act.
The table above shows the officers and Board members who are affiliated with
Distributors and the manager. As of June 1, 1998, nonaffiliated members of
the Board are paid $1,575 for each of the Trust's eight regularly scheduled
Board meetings plus $1,050 per meeting attended. Members of the Board serving
on the audit committee of the Trust and other investment companies in the
Franklin Templeton Group of Funds receive a flat fee of $2,000 per committee
meeting attended, a portion of which is allocated to the fund. As shown
above, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The fees payable to
nonaffiliated Board members by the Trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to Board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to nonaffiliated Board members by the
Trust and by other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME TRUST*** FUNDS**** SERVES*****
Frank H. Abbott, III....... $5,400 $159,051 27
Harris J. Ashton........... 5,100 361,157 49
S. Joseph Fortunato........ 5,100 367,835 51
David Garbellano*.......... 1,500 0 N/A
Edith Holiday**............ 1,200 211,400 25
Frank W.T. LaHaye.......... 5,400 163,753 27
Gordon S. Macklin.......... 5,100 361,157 49
*Deceased, September 27, 1997.
**Appointed January 15, 1998.
***For the fiscal year ended April 30, 1998, during which time fees at the
rate of $300 for each of the Trust's eight meetings plus $300 per meeting
attended were in effect.
****For the calendar year ended December 31, 1998.
****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the Franklin Templeton Funds, as is consistent
with their individual financial goals. In February 1998, this policy was
formally adopted. Each board member is required to invest one-third of fees
received for serving as a director or trustee of a Templeton fund in shares
of one or more Templeton funds and one-third of fees received for serving as
a director or trustee of a Franklin fund in shares of one or more Franklin
funds. This is required until the value of such investments equals or exceeds
five times the board member's annual fees. For purposes of this policy, a
board member's investments include those in the name of family members or
entities controlled by the board member and, for investments made after
February 27, 1998, are valued at cost. Investments that existed on February
27, 1998, were valued as of that date. There is a three year phase-in period
for newly elected board members.
As of April 1, 1999, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately 6,770
Class A shares, or less than 1% of the total outstanding Class A shares of
the fund. Many of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson,
Jr. are brothers and the father and uncle, respectively, of Charles E.
Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Franklin Advisers, Inc. The manager provides investment research and
portfolio management services, including the selection of securities for the
fund to buy, hold or sell and the selection of brokers through whom the
fund's portfolio transactions are executed. The manager's activities are
subject to the review and supervision of the Board to whom the manager
renders periodic reports of the fund's investment activities. The manager and
its officers, directors and employees are covered by fidelity insurance for
the protection of the fund.
The manager and its affiliates act as investment manager to numerous other
investment companies and accounts. The manager may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by the manager on behalf of the
fund. Similarly, with respect to the fund, the manager is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling
any security that the manager and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. The manager is not obligated to refrain from investing in securities
held by the fund or other funds that it manages. Of course, any transactions
for the accounts of the manager and other access persons will be made in
compliance with the fund's Code of Ethics. Please see "Miscellaneous
Information - Summary of Code of Ethics."
Under an agreement with the manager, Templeton Investment Cousel, Inc. is the
fund's sub-advisor. The sub-advisor provides Advisers with investment
management advice and assistance. The sub-advisor also provides a continuous
investment program for the fund, including allocation of the fund's assets
among the various securities markets of the world and investment research and
advice with respect to securities and investments and cash equivalents in the
fund.
MANAGEMENT FEES. Under its management agreement, the fund pays the manager a
management fee equal to an annual rate of 0.625 of 1% of the value of its
average daily net assets up to and including $100 million; 0.50 of 1% of the
value of its average daily net assets over $100 million and not over $250
million; and 0.45 of 1% of the value of its average daily net assets in
excess of $250 million. The fee is computed at the close of business on the
last business day of each month. Each class of the fund's shares pays its
proportionate share of the management fee. Under the sub-advisory agreement,
the manager pays the sub-advisor a sub-advisory fee, in U.S. dollars, equal
to an annual rate of 0.3125 of 1% of the fund's average daily net assets up
to and including $100 million; 0.25 of 1% of the value of the fund's average
daily net assets over $100 million and not over $250 million; and 0.225 of 1%
of the value of the fund's average daily net assets in excess of $250
million. This fee is not a separate expense of the fund but is paid by the
manager from the management fees it receives from the fund. TICI will pay all
expenses incurred in connection with its activities under the subadvisory
agreement with Advisers other than the cost of securities (including
brokerage commissions, if any) purchased for the fund.
For the fiscal years ended April 30, 1998, 1997 and 1996, management fees,
before any advance waiver, totaled $527,061, $129,938 and $58,092,
respectively. Under an agreement by the manager to waive its fees, the fund
paid no management fees for the same periods. For the same periods, the
manager paid the-sub-advisor no sub-advisory fees.
MANAGEMENT AGREEMENTS. The management and sub-advisory agreements are in
effect until February 29, 2000. They may continue in effect for successive
annual periods if their continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to either agreement or
interested persons of any such party (other than as members of the Board),
cast in person at a meeting called for that purpose. The management agreement
may be terminated without penalty at any time by the Board or by a vote of
the holders of a majority of the fund's outstanding voting securities on 60
days' written notice to the manager, or by the manager on 60 days' written
notice to the fund, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act. The sub-advisory agreement may be
terminated without penalty at any time by the Board or by vote of the holders
of a majority of the fund's outstanding voting securities, or by either the
manager or the sub-advisor on not less than 60 days' written notice, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, the manager pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal year ended April 30, 1998, and for the period
October 1, 1996, through April 30, 1997, administration fees totaling
$129,758 and $21,855, respectively, were paid to FT Services. The fee is paid
by the manager. It is not a separate expense of the fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the fund's independent auditor. During the fiscal year
ended April 30, 1998, the auditor's services consisted of rendering an
opinion on the financial statements of the Trust included in the Trust's
Annual Report to Shareholders for the fiscal year ended April 30, 1998.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management
agreement and any directions that the Board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid by the
fund is negotiated between the manager and the broker executing the
transaction. The determination and evaluation of the reasonableness of the
brokerage commissions paid are based to a large degree on the professional
opinions of the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals
in the securities industry and information available to them about the level
of commissions being paid by other institutional investors of comparable
size. The manager will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of the manager, a better price
and execution can otherwise be obtained. Purchases of portfolio securities
from underwriters will include a commission or concession paid by the issuer
to the underwriter, and purchases from dealers will include a spread between
the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services permits the manager to supplement its
own research and analysis activities and to receive the views and information
of individuals and research staffs of other securities firms. As long as it
is lawful and appropriate to do so, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the fund's officers are satisfied that the best execution is
obtained, the sale of fund shares, as well as shares of other funds in the
Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the
benefit of the fund, any portfolio securities tendered by the fund will be
tendered through Distributors if it is legally permissible to do so. In turn,
the next management fee payable to the manager will be reduced by the amount
of any fees received by Distributors in cash, less any costs and expenses
incurred in connection with the tender.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended April 30, 1998, 1997 and 1996, the fund paid
brokerage commissions totaling $3,070, $2,435 and $985, respectively.
As of April 30, 1998, the fund owned securities issued by Salomon Brothers
Inc. and Morgan Stanley & Co. Inc. valued in the amount of $459,788 and
$2,020,781, respectively. Except as noted, the fund did not own any
securities issued by its regular broker-dealers as of the end of the fiscal
year.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Banks and financial institutions that sell
shares of the fund may be required by state law to register as Securities
Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates
provide financial support to various Securities Dealers that sell shares of
the Franklin Templeton Group of Funds. This support is based primarily on the
amount of sales of fund shares. The amount of support may be affected by:
total sales; net sales; levels of redemptions; the proportion of a Securities
Dealer's sales and marketing efforts in the Franklin Templeton Group of
Funds; a Securities Dealer's support of, and participation in, Distributors'
marketing programs; a Securities Dealer's compensation programs for its
registered representatives; and the extent of a Securities Dealer's marketing
programs relating to the Franklin Templeton Group of Funds. Financial support
to Securities Dealers may be made by payments from Distributors' resources,
from Distributors' retention of underwriting concessions and, in the case of
funds that have Rule 12b-1 plans, from payments to Distributors under such
plans. In addition, certain Securities Dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will reinvested in the
fund and exchanged into the new fund at Net Asset Value when paid. Backup
withholding and information reporting may apply. Information regarding the
possible tax consequences of an exchange is included in the tax section in
this SAI and in the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from
the short-term, money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System for which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according
to the broadest and most representative market as determined by 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
before the time when assets are valued. Lacking any sales that day or if the
last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is
believed to fairly reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on
the foreign exchange on which it is traded or as of the close of trading on
the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale
is reported at that time, the foreign security is valued within the range of
the most recent quoted bid and ask prices. Occasionally events that affect
the values of foreign securities and foreign exchange rates may occur between
the times at which they are determined and the close of the exchange and
will, therefore, not be reflected in the computation of the Net Asset Value.
If events materially affecting the values of these foreign securities occur
during this period, the securities will be valued in accordance with
procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the Net Asset Value is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected in
the computation of the Net Asset Value. If events materially affecting the
values of these securities occur during this period, the securities will be
valued at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the fund may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Gain from securities sold by the fund that are held for more than one year
will be taxable at a maximum rate of 20% for individual investors in the 28%
or higher federal income tax brackets; or at a maximum rate of 10% for
individual investors in the 15% federal income tax bracket. Gains from
securities sold by the fund prior to January 1, 1998, are taxable at
different rates depending on the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gain rate is 18% for
individuals in the 28% or higher federal income tax brackets; or 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more
than 5 years which are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares
in order to qualify such shares as qualified 5-year property.
Additional information on reporting capital gains distributions on your
personal income tax returns is available in Franklin Templeton's Tax
Information Handbook. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be
addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following
year, will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by
the fund. Similarly, foreign exchange losses realized by the fund on the sale
of debt instruments are generally treated as ordinary losses by the fund.
These gains when distributed will be taxable to you as ordinary dividends,
and any losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the total assets of the fund
at the end of the fiscal year are invested in securities of foreign
corporations, the fund may elect to pass-through to you your pro rata share
of foreign taxes paid by the fund, subject to certain holding period
requirements. If this election is made, you will be (i) required to include
in your gross income your pro rata share of foreign source income (including
any foreign taxes paid by the fund), and, (ii) entitled to either deduct your
share of such foreign taxes in computing your taxable income or to claim a
credit for such taxes against your U.S. income tax, subject to certain
limitations under the Code. You will be informed by the fund at the end of
each calendar year regarding the availability of any such foreign tax credits
and the amount of foreign source income (including any foreign taxes paid by
the fund). If the fund elects to passthrough to you the foreign income taxes
that it has paid, you will be informed at the end of the calendar year of the
amount of foreign taxes paid and foreign source income that must be included
on your federal income tax return. If the fund invests 50% or less of its
total assets in securities of foreign corporations, it will not be entitled
to passthrough to you your pro rata share of the foreign taxes paid by the
fund. In this case, these taxes will be taken as a deduction by the fund, and
the income reported to you will be the net amount after these deductions.
The procedures by which investors in funds that invest in foreign securities
can claim tax credits on their individual income tax returns for the foreign
taxes paid by the fund have been simplied for tax years beginning in 1998.
These provisions will allow investors who claim a credit for foreign taxes
paid of $300 or less on a single return or $600 or less on a joint return
during any year (all of which must be reported on IRS Form 1099-DIV from the
fund to the investor) to bypass the burdensome and detailed reporting
requirements on the supporting foreign tax credit schedule (Form 1116) and
report foreign taxes paid directly on page 2 of Form 1040.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to you. In such case,
the fund will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of the fund's available earnings and
profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares as
a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. Any
loss incurred on the redemption or exchange of shares held for six months or
less will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you purchase other shares
in the fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you purchase.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your own tax advisor
to determine the application of your state and local laws to these
distributions. Because the rules on exclusion of this income are different
for corporations, corporate shareholders should consult with their corporate
tax advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder,
you should note that only a small percentage of the dividends paid by the
fund for the most recent fiscal year qualified for the dividends-received
deduction. You will be permitted in some circumstances to deduct these
qualified dividends, thereby reducing the tax that you would otherwise be
required to pay on these dividends. The dividends-received deduction will be
available only with respect to dividends designated by the fund as eligible
for such treatment. Dividends so designated by the fund must be attributable
to dividends earned by the fund from U.S. corporations that were not
debt-financed.
INVESTMENT IN COMPLEX SECURITIES. The fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities
and equity options, including options on stock and on narrow-based stock
indexes, will be subject to tax under section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise,
lapse, or closing out of the option or sale of the underlying stock or
security. Certain other options, futures and forward contracts entered into
by the fund are generally governed by section 1256 of the Code. These
"section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options
on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held
by the fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the fund's fiscal year (and on
other dates as prescribed by the Code), and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by section 988 of the Code)
will generally be treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. Even though marked-to-market, gains and
losses realized on foreign currency and foreign security investments will
generally be treated as ordinary income. The effect of section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the fund. The
acceleration of income on section 1256 positions may require the fund to
accrue taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, the fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of fund shares. In these ways, any or all of these rules may affect the
amount, character and timing of income distributed to you by the fund.
When the fund holds an option or contract which substantially diminishes the
fund's risk of loss with respect to another position of the fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term
capital losses into long-term capital losses. The fund may make certain tax
elections for mixed straddles (i.e., straddles comprised of at least one
section 1256 position and at least one non-section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
When the fund enters into "constructive sale transactions," the fund must
recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt
instruments. The fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or
forward contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the fund of ordinary income and short-term
capital gains arising from the fund's investments, including investments in
options, forwards, and futures contracts, will be taxable to you as ordinary
income. The fund will monitor its transactions in such options and contracts
and may make certain other tax elections in order to mitigate the effect of
the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time the fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time the fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of the fund's net investment company taxable income,
which, in turn, will affect the amount of income to be distributed to you by
the fund.
If the fund's section 988 losses exceed the fund's other net investment
company taxable income during a taxable year, the fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your fund shares will be treated as
capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The fund may
invest in shares of foreign corporation which may be classified under the
Code as passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If the fund receives an "excess distribution" with respect to PFIC stock, the
fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the
fund to you. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which the fund
held the PFIC shares. The fund itself will be subject to tax on the portion,
if any, of an excess distribution that is so allocated to prior fund taxable
years, and an interest factor will be added to the tax, as if the tax had
been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the
fund. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital
gain. This may have the effect of increasing fund distributions to you that
are treated as ordinary dividends rather than long-term capital gain
dividends.
The fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, under another
election that involves marking-to-market the fund's PFIC shares at the end of
each taxable year (and on certain other dates as prescribed in the Code),
unrealized gains would be treated as though they were realized. The fund
would also be allowed an ordinary deduction for the excess, if any, of the
adjusted basis of its investment in the PFIC stock over its fair market value
at the end of the taxable year. This deduction would be limited to the amount
of any net mark-to-market gains previously included with respect to that
particular PFIC security. If the fund were to make this second PFIC election,
tax at the fund level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount
of tax payable by the fund (if any), the amounts distributable to you by the
fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is
a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after the fund acquires shares in that corporation. While
the fund will generally seek to avoid investing in PFIC shares to avoid the
tax consequences detailed above, there are no guarantees that it will do so
and it reserves the right to make such investments as a matter of its
fundamental investment policy.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to
the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the fund's expected return is
attributable to the time value of the fund's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
Section 263(g) of the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the
stock has been separated from the right to receive dividends that have not
yet become payable. The stock must have a fixed redemption price, must not
participate substantially in the growth of the issuer, and must be limited
and preferred as to dividends. The difference between the redemption price
and purchase price is taken into fund income over the term of the instrument
as if it were original issue discount. The amount that must be included in
each period generally depends on the original yield to maturity, adjusted for
any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS.
The fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation.
For periods before August 12, 1998, standardized performance quotations for
Advisor Class will be calculated by substituting Class A performance for the
relevant time period, excluding the effect of Class A's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class A
shares of the fund. For periods after August 12, 1998, standardized
performance quotations for Advisor Class will be calculated as described
below.
An explanation of these and other methods used by the fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
These figures will be calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at Net Asset Value. Cumulative total return, however, will be based on the
actual return for a specified period rather than on the average return over
the periods indicated above.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the fund.
It is calculated by dividing the net investment income per share earned
during a 30-day base period by the Net Asset Value per share on the last day
of the period and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders during the base period.
These figures will be obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1)6 - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the Net Asset Value per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders of the fund. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share during a certain period
and dividing that amount by the current Net Asset Value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and will be calculated over a different period of time.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of the fund as a potential investment
for Individual Retirement Accounts (IRAs), Business Retirement Plans, and
other tax-advantaged retirement plans may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average
is a combination of the Dow Jones Industrial Average (30 blue-chip stocks
that are generally leaders in their industry), the Dow Jones Transportation
Average (20 transportation stocks), and the Dow Jones Utilities Average (15
utility stocks involved in the production of electrical energy).
b) Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed
on the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the
prices of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock
Index is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the fund's shares can
be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years
and now services more than 3 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $216 billion in
assets under management for more than 7 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
114 U.S. based open-end investment companies to the public. The fund may
identify itself by its NASDAQ symbol or CUSIP number.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
As of April 1, 1999, the principal shareholders of the fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
CLASS C
Helen P. Mitta 29,319.374 9.96%
8702 Wakefield Dr.
Palm Beach Gardens, FL 33410 -6362
Paine Webber Inc. FBO 16,030.311 5.45%
Patricia H. Meehan Trustee
Patricia H. Meehan Revocable Trust
DTD 12 07 93
1567 Arcadia Drive
Jacksonville, FL 32207-7807
Prudential Securities Inc. FBO 18,656.716 6.34%
Glenn D. Benoit
60 Route 4 W
Woodstock, VT 05091-1248
From time to time, the number of fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended April 30, 1998,
including the auditor's report, and the unaudited financial statements
contained in the Semiannual Report to Shareholders of the Trust for the six
month period ended October 31, 1998, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS A, CLASS B, CLASS C AND ADVISOR CLASS - The fund offers four classes of
shares, designated "Class A," "Class B," "Class C," and "Advisor Class." The
four classes have proportionate interests in the fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
PROSPECTUS - The prospectus for Advisor Class shares of the fund dated May
[], 1999, which we may amend from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
