TFS-P
SUPPLEMENT TO THE PROSPECTUS
DATED MARCH 1, 1995
(each as previously supplemented February 1, 1995 and as may be
further amended and supplemented)
Age High Income Fund Fund
Dated October 1, 1994
Franklin Balance Sheet Investment Fund
Dated March 1, 1995
Franklin California Tax-Free Income Fund, Inc.
Dated August 1, 1994
Franklin California Insured Tax-Free Income Fund
Dated November 1, 1994
Franklin California Intermediate-Term Tax-Free Income Fund, Dated
November 1, 1994
Franklin Custodian Funds, Inc.
(FCF - Growth, Utilities, DynaTech, Income And U.S. Government
Securities Series)
and the separate prospectuses for Income Series and U.S.
Government Securities Series
All Dated February 1, 1995
Franklin Equity Fund
Dated November 1, 1994, as Amended January 19, 1995
Franklin Federal Tax-Free Income Fund
Dated September 1, 1994
Franklin Gold Fund
Dated December 1, 1994
Franklin Pacific Growth Fund
Dated March 1, 1995
Franklin International Equity Fund
Dated March 1, 1995
Franklin Global Government Income Fund
Dated March 1, 1995
Franklin Short-Intermediate U.S. Government Securities Fund,
Dated March 1, 1995
Franklin Convertible Securities Fund
Dated March 1, 1995
Franklin Adjustable U.S. Government Securities Fund
Dated March 1, 1995
Franklin Equity Income Fund
Dated March 1, 1995
Franklin Adjustable Rate Securities Fund
Dated March 1, 1995
Franklin Corporate Qualified Dividends Fund
Dated February 1, 1995
Franklin Rising Dividends Fund
Dated February 1, 1995
Franklin Investment Grade Income Fund
Dated February 1, 1995
Franklin Municipal Securities Trust
(Hawaii, Washington, Tennessee and Arkansas Municipal Bond Funds)
Dated October 1, 1994
Franklin California High Yield Municipal Fund
Dated October 1, 1994
Franklin New York Tax-Free Income Fund, Inc.
Dated October 1, 1994
Franklin New York Insured Tax-Free Income Fund
Dated May 1, 1994
Franklin New York Intermediate-Term Tax Free Income Fund
Dated May 1, 1994
Franklin Partners Funds
(FPF - Franklin Tax-Advantaged International Bond, U.S.
Government Securities and High Yield Securities Funds)
Dated May 1, 1994, as Amended October 21, 1994
Franklin Premier Return Fund
Dated May 1, 1994, As Amended September 8, 1994
Franklin Real Estate Securities Fund
Dated September 1, 1994
Franklin Strategic Mortgage Portfolio
Dated February 1, 1995
Franklin California Growth Fund
Dated September 1, 1994, as Amended November 11, 1994
Franklin Strategic Income Fund
Dated December 30, 1994
Franklin Global Utilities Fund
Dated September 1, 1994
Franklin Small Cap Growth Fund
Dated September 1, 1994
Franklin Federal Intermediate Tax-Free Income Fund
Dated July 1, 1994, as amended September 30, 1994
Franklin Tax Free Trust
(TF1 - Insured, Massachusetts Insured, Michigan Insured,
Minnesota Insured, Ohio Insured, Arizona Insured and Florida
Insured Tax-Free Income Funds)
Dated July 1, 1994,
(TF2 - Alabama, Florida, Georgia, Kentucky, Louisiana, Maryland,
Missouri, North Carolina, Texas and Virginia Tax-Free Income
Funds)
Dated July 1, 1994, As Amended October 4, 1994
(TF3 - Arizona, Colorado, Connecticut, Indiana, New Jersey, Ohio,
Oregon, Pennsylvania, Puerto Rico and High Yield Tax-Free Income
Funds)
Dated July 1, 1994, As Amended October 4, 1994
Franklin Templeton German Government Bond Fund
Dated March 1, 1995
Franklin Templeton International Currency Funds
(Global, High and High Income Currency Funds)
Dated March 1, 1995
During the period March 1, 1995 through April 30, 1995, the
securities firm of TFS Securities, Inc., ("TFS") will receive the
full front-end sales commission with respect to purchases
originated by TFS, from Franklin Templeton Distributors, Inc.,
the principal underwriter for the above funds.
Franklin Strategic Mortgage Portfolio
PROSPECTUS
February 1, 1995
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
The Franklin Strategic Mortgage Portfolio (the "Fund") is an open-
end, diversified management investment company, commonly called a
"mutual fund." The investment objective of the Fund is to obtain
a high level of total return relative to the performance of the
general mortgage securities market. The Fund seeks to achieve
this objective by investing primarily in a portfolio of mortgage
securities created from pools of mortgages which are issued or
guaranteed by the U.S. government, its agencies or
instrumentalities. The mortgage securities in which the Fund will
invest are issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"). In addition to these mortgage securities,
the Fund may invest up to 35% of its total assets in adjustable
rate mortgage securities ("ARMs"), collateralized mortgage
obligations ("CMOs") and stripped mortgage-backed securities
("SMBS"). The Fund is designed for individuals as well as certain
institutional investors. There can, of course, be no assurance
that the Fund's objective will be achieved.
This Prospectus is intended to set forth in a clear and concise
manner information about the Fund that a prospective investor
should know before investing. After reading the Prospectus, it
should be retained for future reference; it contains information
about the purchase and sale of shares and other items which a
prospective investor will find useful to have.
Shares of the Fund are not deposits or obligations of, or
guaranteed or endorsed by, any bank; further, such shares are not
federally insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency. Shares of the
Fund involve investment risks, including the possible loss of
principal.
A Statement of Additional Information ("SAI") concerning the
Fund, dated February 1, 1995, as may be amended from time to
time, provides a further discussion of certain areas in this
Prospectus and other matters which may be of interest to some
investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A
copy is available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein
described in any state in which the offering is not authorized.
No sales representative, dealer, or other person is authorized to
give any information or make any representations other than those
contained in this Prospectus. Further information may be obtained
from the underwriter.
Contents Page
Expense Table
Financial Highlights
About the Fund
Investment Objective
and Policies of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
and Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund in
Connection with Retirement Plans
Involving Tax-Deferred Investments
Other Programs and Privileges
Available to Fund
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding
an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
Expense Table
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a shareholder
will bear directly or indirectly in connection with an investment
in the Fund. These figures are based on aggregate operating
expenses of the Fund (including fees set by contract) for the
fiscal year ended September 30, 1994.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.25%
Maximum Sales Charge Imposed on Reinvested
Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fee (per transaction) $5.00*
*$5.00 fee is imposed only on Timing Accounts as described under
"Exchange Privilege." All other exchanges are without charge.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.40%**
12b-1 Fees NONE
Other Expenses:
Registration fees 0.32%
Professional fees 0.23%
Other 0.33%
-----
Total Other Expenses 0.88%
-----
Total Fund Operating Expenses 1.28%**
=====
**Represents the amount that would have been payable to the
investment manager, absent a fee reduction by the investment
manager. The investment manager, however, waived its management
fees and assumed responsibility for making payments to offset the
operating expenses otherwise payable by the Fund. With this
reduction, the Fund paid no management fees or operating
expenses.
Investors should be aware that the preceding table is not
intended to reflect in precise detail the fees and expenses
associated with an individual's own investment in the Fund.
Rather the table has been provided only to assist investors in
gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters,
investors should refer to the appropriate sections of this
Prospectus.
Example
As required by SEC regulations, the following example illustrates
the expenses, including the initial sales charge, that apply to a
$1,000 investment in the Fund over various time periods assuming
(1) a 5% annual rate of return and (2) redemption at the end of
each time period. As noted in the preceding table, the Fund
charges no redemption fees:
One Year Three Years Five Years Ten Years
$55 $81 $110 $190
This example is based on the aggregate annual operating expenses,
including fees set by contract, shown above and should not be
considered a representation of past or future expenses, which may
be more or less than those shown. The operating expenses are
borne by the Fund and only indirectly by shareholders as a result
of their investment in the Fund. In addition, federal regulations
require the example to assume an annual return of 5%, but the
Fund's actual return may be more or less than 5%.
<TABLE>
<CAPTION>
Financial Highlights
Set forth below is a table containing the financial highlights for a share
of the Fund from February 1, 1993 (the effective date of registration),
through September 30, 1993, and for fiscal year ended September 30, 1994.
The information has been audited by Coopers & Lybrand L.L.P., independent
auditors, whose audit report appears in the financial statements in the
Fund's SAI. See the discussion "Reports to Shareholders" under "General
Information."
<S> <C> <C> <C> <C> <C>
Net Asset Net Realized Dividends
Value Net Unrealized Total From From Net
Year Beginning Investment Gain (Loss)on Investment Investment
Ended of Year Income Securities Operations Income
<C> <C> <C> <C> <C> <C>
1993* $10.00 $.36 $.245 $.605 $(.365)
1994 10.24 .55 (.708) (.158) (.553)
</TABLE>
<TABLE>
<C> <C> <C> <C> <C> <C> <C> <C>
Distri- Net Ratio of Ratio
butions Asset Net Expenses of Net
From Value Assets to Income to
Realized Total at End at End Average Average Portfolio
Capital Distri- of Total of Net Net Turnover
Gains bution Year Return+ Year Assets++ Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C>
$--- (.365) $10.24 6.13% $5,306 -% 3.59%** 216.91%
(.109) (.662) 9.42 (1.61)% 5,223 -% 5.65% 204.55%
+Total return measures the change in value of an investment over the period
indicated. It does not include the maximum initial sales charge and
assumes reinvestment of dividends and capital gains at net asset value and
is not annualized.
*For the period February 1, 1993 (effective date) to September 30, 1993.
**Annualized
***During the periods indicated, the investment manager agreed to waive in
advance management fees and made payments of other expenses incurred by the
Fund. Had such action not been taken, the ratio of operating expenses to
average net assets would have been 1.22% (annualized) and 1.28%
respectively.
</TABLE>
About the Fund
The Fund is an open-end, diversified management investment
company, or mutual fund, which is registered with the SEC under
the Investment Company Act of 1940 (the "1940 Act"). The Fund is
a Delaware business trust, organized on September 23, 1992, and
issues shares of beneficial interest.
Shares of the Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering
price which is equal to the Fund's net asset value (see
"Valuation of Fund Shares") plus a sales charge based upon a
variable percentage (ranging from 4.25% to 0% of the offering
price) depending upon the amount invested. (See "How to Buy
Shares of the Fund.")
Investment Objective
and Policies of the Fund
The investment objective of the Fund is to obtain a high level of
total return relative to the performance of the general mortgage
securities market. The objective is a fundamental policy of the
Fund and may not be changed without shareholder approval. The
Fund seeks to achieve a high level of total return through a
combination of high income and capital appreciation by investing
primarily (at least 65% of its total assets) in a portfolio of
mortgage securities created from pools of mortgages which are
issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The mortgage securities in which the Fund may
invest are issued or guaranteed by GNMA, FNMA and FHLMC. In
addition to these mortgage securities, the Fund may invest up to
35% of its total assets in other securities including ARMs, CMOs
and SMBS, which may include privately-issued mortgage securities.
In attempting to achieve a high level of total return, the Fund
seeks higher interest return than may generally be available from
fixed-rate mortgage securities by investing up to 35% of its
assets in higher income producing mortgage securities such as
ARMs, CMOs & SMBS. The Fund may also invest in futures contracts
and options on futures contracts and may engage in other
transactions described under the subcaption "Other Investment
Policies of the Fund."
The Characteristics of the Mortgage
Securities in Which the Fund Invests
A mortgage security is an interest in a pool of mortgage loans.
Most mortgage securities are pass-through securities, which means
that they provide investors with payments consisting of both
principal and interest as mortgages in the underlying pool are
paid off by the borrowers. The primary issuers or guarantors of
mortgage securities are GNMA, FNMA and FHLMC. These mortgage
securities are called pass-through certificates ("Certificates")
because a pro rata share of both regular interest and principal
payments, as well as unscheduled early prepayments on the
underlying mortgage pool, are passed through monthly to the
holder of the Certificate (i.e., the Fund). The Fund invests in
both "modified" and "straight" pass-through mortgage-backed
securities. Principal and interest are guaranteed for "modified
pass-through" type certificates, as opposed to "straight pass-
through" certificates for which such guarantee is not available.
CMOs and SMBS are not pass-through securities.
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. FNMA guarantees full and timely payment of
all interest and principal, and FHLMC guarantees timely payment
of interest and the ultimate collection of principal. Mortgage
securities from FNMA and FHLMC are not backed by the full faith
and credit of the U.S. government. Notwithstanding the foregoing,
because FNMA and FHLMC are instrumentalities of the U.S.
government, these securities are generally considered to be high
quality investments having minimal credit risks. 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.
Guarantees as to the timely payment of principal and interest do
not extend to the value or yield of such securities nor do they
extend to the value of the Fund's shares. In general, the value
of fixed-income securities varies inversely with changes in
market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates.
Interest rates of ARMs move with market interest rates, and thus
their value tends to fluctuate to a lesser degree. In view of
such factors, the ability of the Fund to obtain a high level of
total return may be limited under varying market conditions.
At least 65% of the Fund's total assets will be invested in
securities rated AAA or Aaa by Standard & Poor's Corporation
("S&P") or Moody's Investors Service ("Moody's"), respectively,
or, if unrated, will be deemed to be of comparable quality by the
Fund's investment manager. As to the remaining 35% of the Fund's
assets, the portfolio securities will be rated at least AA or Aa
by S&P or Moody's, respectively, or, if unrated, will be deemed
to be of comparable quality by the Fund's investment manager. In
the event the rating of an issue is changed by the ratings
service or the security goes into default, such event will be
considered by the Fund in its evaluation of the overall
investment merits of that security, but will not require
immediate disposal by the Fund.
Mortgage securities generally have an average life less than
their stated maturity. Because of variations in prepayment
rights, it is not possible to accurately predict the life of a
particular mortgage-related investment. The occurrence of
mortgage prepayment is affected by factors including the level of
interest rates, general economic conditions, the location and age
of the mortgage and other social and demographic conditions.
Accordingly, the life of an individual mortgage security is
likely to be substantially shorter than the stated maturity of
the mortgages in the underlying pool.
Yields on mortgage-related securities are typically quoted based
on the maturity of the underlying instruments and the associated
average life assumption. Actual prepayment experience may cause
the yield to differ from the assumed average life yield. If
mortgage interest rates decrease, the value of the Fund's
securities generally will increase; however, it is anticipated
that the average life of the mortgages in the pool will decrease
as borrowers refinance and prepay mortgages in order to take
advantage of lower rates. The proceeds to the Fund from such
prepayments will have to be invested at the then prevailing lower
interest rates. On the other hand, if interest rates increase,
the value of the Fund's securities generally will decrease, while
it is anticipated that borrowers will not refinance and therefore
the average life of the mortgages in the pool will be longer.
Adjustable Rate Mortgage Securities. An ARM, like a traditional
mortgage security, is an interest in a pool of mortgage loans.
The ARMs in which the Fund invests may be issued or guaranteed by
one of the federal agencies or by private issuers. The adjustable
interest rate feature of the mortgages underlying the ARMs in
which the Fund invests generally will act as a buffer to reduce
sharp changes in the market value of the ARMs and thus in the
Fund's net asset value in response to normal interest rate
fluctuations. As the interest rates on the mortgages underlying
the Fund's ARMs investments are reset periodically, yields of the
securities will gradually align themselves to reflect changes in
market rates and should cause the net asset value of the Fund to
fluctuate less dramatically than it would if the Fund invested
all of its assets in long-term, fixed-rate debt securities.
During periods of rising interest rates, however, changes in the
coupon rate lag behind changes in the market rate. During periods
of extreme fluctuations in interest rates, the resulting
fluctuation of ARM rates could affect the net asset value of the
Fund in proportion to the Fund's investment in ARMs. Since most
ARMs in the Fund's portfolio will generally have annual reset
limits or "caps" of 100 to 200 basis points, fluctuation in
interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-
rate debt securities.
Unlike fixed-rate mortgages, which generally decline in value
during periods of rising interest rates, adjustable rate mortgage
securities allow the Fund to participate in increases in interest
rates through periodic adjustments in the coupons of the
underlying mortgages, resulting in both higher current yields and
lower price fluctuations. Furthermore, if prepayments of
principal are made on the underlying mortgages during periods of
rising interest rates (e.g., due to home sales or foreclosures),
the Fund generally will be able to reinvest such amounts in
securities with a higher current rate of return. The Fund,
however, will not benefit from increases in interest rates to the
extent that interest rates rise to the point where they cause the
current coupon of adjustable rate mortgages held as investments
by the Fund to exceed the maximum allowable periodic or lifetime
reset limits (or "cap rates") for a particular mortgage.
During periods of declining interest rates, of course, the coupon
rates may readjust downward, resulting in lower yields to the
Fund. This aspect of ARMs may impede the ability of the Fund to
achieve a high total return. Further, because of this feature,
the value of ARMs is unlikely to rise during periods of declining
interest rates to the same extent as fixed-rate instruments. As
with other mortgage-backed securities, interest rate declines may
result in accelerated prepayment of mortgages due to refinancings
and the proceeds from such prepayments must be reinvested at
lower prevailing interest rates.
One additional difference between ARMs and fixed-rate mortgages
is that for certain types of ARM securities, the rate of
amortization of principal, as well as interest payments, can and
does change in accordance with movements in a particular, pre-
specified, published interest rate index. For example, ARMs can
have negative amortization, which can extend the average life of
the securities. 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.
Collateralized Mortgage Obligations. The Fund may also invest in
CMOs. A CMO is a mortgage-backed security collateralized by a
pool of mortgages or mortgage securities that separates mortgage
pools into short-, medium- and long-term components. Each
component pays a fixed rate or a variable rate (reset
periodically at a specified increment over an index) of interest
at regular intervals. These components enable an investor such as
the Fund to more accurately predict the pace at which principal
is returned. CMOs are issued by government agencies, single-
purpose, stand-alone finance subsidiaries or trusts established
by financial institutions or other similar institutions. The Fund
will invest in privately issued CMOs and CMOs issued or
guaranteed by U.S. government agencies, which will be:
(1) collateralized by pools of mortgages in which each mortgage
is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; or
(2) collateralized by pools of mortgages in which payment of
principal and interest are guaranteed by the issuer and the
guarantee is collateralized 100% by U.S. government securities.
The guarantee is provided by a special purpose entity without
assets other than the mortgages and the government securities.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is
issued at a specified coupon rate or adjustable rate tranche and
has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO 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 semi-annual basis. The principal
and interest on the underlying mortgages may be allocated among
several classes of a series of a CMO 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. Other priority sequences based on
prepayment or interest rate levels are possible.
Yields on privately issued CMOs have been historically higher
than the yields on CMOs issued or guaranteed by U.S. government
agencies. The risk of loss due to default on such instruments,
however, is higher since they are not guaranteed by the U.S.
government. The trustees of the Fund believe 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. The
Fund will not invest in subordinated privately issued CMOs or in
residual interests of CMOs.
To the extent any privately issued CMOs in which the Fund invests
are considered by the SEC to be investment companies, the Fund
will limit its investments in such securities in a manner
consistent with the provisions of the 1940 Act.
Resets. The interest rates paid on the ARMs and CMOs in which the
Fund invests generally are readjusted at intervals of one year or
less to an increment over some predetermined interest rate index,
although instruments with longer resets such as three years and
five years are also permissible investments. 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, and those based on a moving average of
mortgage rates and actual market rates.
Caps and Floors. The underlying mortgages which collateralize the
ARMs and CMOs in which the Fund invests 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.
Stripped Mortgage-Backed Securities. The Fund may also invest in
SMBS, which are derivative multiclass mortgage securities, to
achieve a higher yield than may be available from fixed-rate
mortgage securities. The SMBS 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 have more liquidity than privately issued SMBS. SMBS
have greater market volatility than other types of mortgage
securities in which the Fund invests.
SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of SMBS will have one
class receiving some of the interest and most of the principal
from the mortgage assets, while the other class will receive most
of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The
yield to maturity of an IO and PO class is extremely sensitive
not only to changes in prevailing interest rates but also to the
rate of principal payments (including prepayments) on the related
underlying mortgage assets. A rapid rate of principal payments
may have a material adverse effect on the IO's yield to maturity
and a slower than anticipated principal payment would have a
material adverse effect on the PO's yield to maturity. If the
underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its
initial investment in an IO even if the securities are rated in
the highest rating categories, AAA or Aaa, by S&P or Moody's,
respectively. As noted above, the Fund may invest up to 35% in
SMBS.
SMBS are purchased and sold by institutional investors, such as
the Fund, through several investment banking firms acting as
brokers or dealers. As these securities were only recently
developed, traditional trading markets have not yet been
established for all such securities. Accordingly, some of these
securities may generally be illiquid. The staff of the SEC (the
"Staff") has indicated that only government-issued IO or PO
securities which 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 Fund's Board of Trustees
may, in the future, adopt procedures which would permit the Fund
to acquire, hold, and treat as liquid government-issued IO and PO
securities. At the present time, however, all such securities
will continue to be treated as illiquid and will, together with
any other illiquid investment, not exceed 10% of the Fund's net
assets. Such position may be changed in the future, without
notice to shareholders, in response to the Staff's continued
reassessment of this matter as well as to changing market
conditions.
Risks of Mortgage Securities
The mortgage securities in which the Fund principally invests
differ from conventional bonds in that principal is paid back
over the life of the mortgage security rather than at maturity.
As a result, the holder of the mortgage securities (i.e., the
Fund) receives monthly scheduled payments of principal and
interest, and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. When the
holder reinvests the payments and any unscheduled prepayments of
principal it receives, it may receive a rate of interest which is
lower than the rate on the existing mortgage securities. For this
reason, mortgage securities may be less effective than other
types of U.S. government securities as a means of "locking in"
long-term interest rates.
The market value of mortgage securities, like other U.S.
government securities, will generally vary inversely with changes
in market interest rates, declining when interest rates rise and
rising when interest rates decline. Mortgage securities may have
less potential for capital appreciation than other investments of
comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition,
to the extent mortgage securities are purchased at a premium,
unscheduled principal prepayments, including such prepayments
resulting from mortgage foreclosures, may result in some loss of
the holders' principal investment to the extent of the premium
paid. On the other hand, if mortgage securities are purchased at
a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current and
total returns and will accelerate the recognition of income
which, when distributed to shareholders, will be taxable as
ordinary income.
Other Investment Policies of the Fund
Repurchase Agreements. For short-term cash management, the Fund
may engage in repurchase transactions, in which the Fund
purchases a U.S. government security subject to resale to a bank
or dealer at an agreed-upon price and date. The transaction
requires the collateralization of the seller's obligation by the
transfer of securities with an initial market value, including
accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage
of at least 100%. A default by the seller might cause the Fund to
experience a loss or delay in the liquidation of the collateral
securing the repurchase agreement. The Fund might also incur
disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with
financial institutions such as broker-dealers and banks which are
deemed creditworthy by the Fund's investment manager. A
repurchase agreement is deemed to be a loan by the Fund under the
1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian
approved by the Fund's Board and will be held pursuant to a
written agreement.
When-Issued and Delayed Delivery Transactions. The Fund may
purchase U.S. government obligations on a "when-issued" or
"delayed delivery" basis. These transactions are arrangements
under which the Fund purchases securities which have been
authorized but not yet issued with payment for and delivery of
the security scheduled for a future time, generally in 30 to 60
days. Purchases of U.S. government securities on a when-issued or
delayed delivery basis are subject to the risk that the value or
yields at delivery may be more or less than the purchase price or
the yields available when the transaction was entered into.
Although the Fund will generally purchase U.S. government
securities on a when-issued basis with the intention of holding
such securities, it may sell such securities before the
settlement date if it is deemed advisable. When the Fund is the
buyer in such a transaction, it will maintain, in a segregated
account with its custodian, cash or high-grade marketable
securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent the
Fund engages in when-issued and delayed delivery transactions, it
will do so only for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies, and
not for the purpose of investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller to
complete the transaction. The seller's failure to do so may cause
the Fund to miss a price or yield considered advantageous.
Securities purchased on a "when-issued" or "delayed delivery"
basis do not generally earn interest until their scheduled
delivery date. Entering into a when-issued or delayed delivery
transaction is a form of leverage that may exacerbate changes in
net asset value per share. The Fund is not subject to any
percentage limit on the amount of its assets which may be
invested in when-issued purchase obligations.
Futures Contracts and Options on Futures Contracts. The Fund may
enter into contracts for the purchase or sale for future delivery
of debt securities ("Futures Contracts") and may purchase or
write options to buy or sell Futures Contracts ("Options on
Futures Contracts") traded on U.S. and foreign exchanges. These
investment techniques are designed only to hedge against
anticipated future changes in interest rates which otherwise
might either adversely affect the value of the Fund's portfolio
securities or adversely affect the prices of securities which the
Fund intends to purchase at a later date. Should interest rates
move in an unexpected manner, the Fund may not achieve the
anticipated benefits of Futures Contracts or Options on Futures
Contracts or may realize a loss. A further discussion of the use,
risks and costs of Futures Contracts and Options on Futures
Contracts is included in the SAI.
Futures Contracts and Options on Futures Contracts may only be
used for hedging purposes, not for speculation. In addition to
complying with this requirement, the Fund will not purchase or
sell Futures Contracts and Options on Futures Contracts if
immediately thereafter the amount of initial margin deposits on
all the futures positions of the Fund and premiums paid on
Options on Futures Contracts would exceed 5% of the market value
of the total assets of the Fund.
The Fund's ability to invest in Futures Contracts and Options on
Futures Contracts may be limited by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for
qualification of the Fund as a regulated investment company, and
is also subject to special tax rules that may affect the amount,
timing and character of distributions to shareholders. More
information about this is included in the tax section in the SAI.
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 roll
period, the Fund forgoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated by the
difference between the current sales price and the lower forward
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 which matures on or before the
forward settlement date of the mortgage dollar roll transaction.
Mortgage dollar rolls that are not covered rolls will constitute
a borrowing and will be included in the calculation of the Fund's
borrowings. Covered rolls, however, are not treated as a
borrowing or other senior security and will be excluded from the
calculation of the Fund's borrowings and other senior securities.
The Fund could suffer a loss if the contracting party failed to
perform the future forward 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.
Borrowing. The Fund may not borrow money or mortgage or pledge
any of its assets, except that it may borrow from banks for
temporary or emergency purposes up to 20% of its total assets and
pledge its assets in connection therewith and except to the
extent that an uncovered mortgage dollar roll may be considered
to be a borrowing. The Fund may not, however, purchase any
portfolio securities while borrowings representing more than 5%
of its total assets are outstanding.
Loan of Portfolio Securities. Consistent with procedures approved
by the Board of Trustees and subject to the following conditions,
the Fund may lend its portfolio securities to qualified
securities dealers or other institutional investors, provided
that such loans do not exceed 10% of the value of the Fund's
total assets at the time of the most recent loan. The borrower
must deposit with the Fund's custodian collateral with an initial
market value of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 102%. Such collateral
shall consist of cash. The lending of securities is a common
practice in the securities industry. The Fund engages in security
loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in
short-term interest bearing obligations or by receiving a loan
premium from the borrower. Under the securities loan agreement,
the Fund continues to be entitled to all dividends or interest on
any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral
should the borrower of the security fail financially.
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. As with other mortgage-
backed securities, interest rate declines may result in
accelerated prepayment of mortgages and the proceeds from such
prepayments must be reinvested at lower prevailing interest
rates. During periods of extreme fluctuations in interest rates,
the resulting fluctuation could affect the net asset value of the
Fund in proportion to the Fund's investment in inverse floaters.
An accelerated decline in interest rates creates a higher degree
of volatility and risk.
Other Permitted Investments. Other investments permitted by the
Fund consist of obligations of the United States, notes, bonds,
and discount instruments of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, FNMA, GNMA,
the Student Loan Marketing Association, the Resolution Funding
Corporation, and the Federal Farm Credit Bank, time and savings
deposits (including fixed or adjustable rate certificates of
deposit) in commercial or savings banks or in institutions whose
accounts are insured by the FDIC, and other securities which are
consistent with the Fund's investment objective. The Fund's
investments in savings deposits are generally deemed to be
illiquid and will, together with any other illiquid investments,
not exceed 10% of the Fund's total net assets. The Fund's
investments in time deposits will not exceed 10% of its total
assets.
Illiquid Investments. It is the policy of the Fund that illiquid
securities (securities that cannot be disposed of within seven
days in the normal course of business at approximately the amount
at which the Fund has valued the securities) may not constitute,
at the time of purchase, more than 10% of the value of the total
net assets of the Fund.
Temporary Defensive Positions. For temporary defensive purposes
only, when the investment manager believes that market conditions
would cause serious erosion of portfolio value, the Fund may
invest its assets without limit in U.S. government securities,
certificates of deposit of banks having total assets in excess of
$5 billion, and repurchase agreements. Under such circumstances,
the Fund is not pursuing its investment objective but is
attempting to preserve the Fund's assets and the shareholder's
principal.
Investment Restrictions
The Fund is subject to a number of additional investment
restrictions, some of which have been adopted as fundamental
policies of the Fund and may only be changed with the approval of
a majority of the outstanding voting securities of the Fund. For
a list of these restrictions and more information concerning the
policies discussed herein, please see the SAI.
The Fund's portfolio turnover rate may exceed 100% per year.
Because a higher turnover rate increases transactions costs and
may increase taxable capital gains, the investment manager will
consider the potential benefits of investing in mortgage dollar
rolls against these considerations.
How Shareholders Participate in the Results of the Fund's
Activities
The assets of the Fund are invested in portfolio securities. If
the securities owned by the Fund increase in value, the value of
the shares of the Fund which the shareholder owns will increase.
If the securities owned by the Fund decrease in value, the value
of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the
securities owned by the Fund. In addition to the factors which
affect the value of individual securities, as described in the
preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader
equity and bond markets, as well. In particular, changes in
interest rates will affect the value of the Fund's portfolio and
thus its share price. Increased rates of interest which
frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of Fund shares.
History reflects both increases and decreases in the prevailing
rate of interest and these may reoccur unpredictably in the
future.
Management of the Fund
The Board of Trustees has the primary responsibility for the
overall management of the Fund and for electing the officers of
the Fund who are responsible for administering its day-to-day
operations.
Franklin Institutional Services Corporation ("FISCO" or
"Manager") serves as the Fund's investment manager. FISCO is a
wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H.
Johnson, Jr. who own approximately 20% and 16%, respectively, of
Resources' outstanding shares. Resources is engaged in various
aspects of the financial services industry through its various
subsidiaries (the "Franklin Templeton Group"). The Manager offers
investment management services to institutional investors.
Pursuant to the management agreement, the Manager supervises and
implements the Fund's investment activities and provides certain
administrative services and facilities which are necessary to
conduct the Fund's business.
During the start-up period of the Fund, FISCO did not impose any
management fees and assumed responsibility for making payments to
offset the operating expenses otherwise payable by the Fund. This
action by FISCO to limit its management fees and assume
responsibility for payment of expenses related to the operations
of the Fund may be terminated by FISCO at any time. During the
fiscal year ended September 30, 1994, fees totaling 0.40% of the
average daily net assets of the Fund would have accrued to FISCO.
Total operating expenses, including management fees, would have
represented 1.28% of the average daily net assets of the Fund.
Pursuant to an agreement by FISCO to limit its fees, the Fund
paid no management fees or operating expenses.
Among the responsibilities of the Manager under the management
agreement is the selection of brokers and dealers through whom
transactions in the Fund's portfolio securities will be effected.
The Manager tries to obtain the best execution on all such
transactions. If it is felt that more than one broker is able to
provide the best execution, the Manager will consider the
furnishing of quotations and of other market services, research,
statistical and other data for the Manager and its affiliates, as
well as the sale of shares of the Fund, as factors in selecting a
broker. Further information is included under "The Fund's
Policies Regarding Brokers Used on Portfolio Transactions" in the
SAI.
Shareholder accounting and many of the clerical functions for the
Fund are performed by Franklin/Templeton Investor Services, Inc.
("Investor Services" or "Shareholder Services Agent"), in its
capacity as transfer agent and dividend-paying agent. Investor
Services is a wholly-owned subsidiary of Resources.
Distributions to Shareholders
There are two types of distributions which the Fund may make to
its shareholders:
1. Income dividends. The Fund receives income in the form of
dividends, interest and other income derived from its
investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which income
dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains
or losses in connection with sales or other dispositions of its
portfolio securities. Distributions by the Fund derived from net
short-term and net long-term capital gains (after taking into
account any net capital loss carryovers) may generally be made
once a year in December to reflect any net short-term and net
long-term capital gains realized by the Fund as of October 31 of
the current fiscal year and any undistributed net capital gains
from the prior fiscal year. The Fund may make more than one
distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these
distributions for operational or other reasons.
Distribution Date
Although subject to change by the Board of Trustees, without
prior notice to or approval by shareholders, the Fund's current
policy is to declare income dividends daily and pay them monthly
on or about the last business day of each month. The amount of
income dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio holdings,
is not guaranteed and is subject to the discretion of the Board
of Trustees. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
Dividend Reinvestment
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's
account in the form of additional shares, valued at the closing
net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their
election with respect to the receipt of distributions by
notifying the Fund, but any such change will be effective only as
to distributions for which the reinvestment date is seven or more
business days after the Fund has been notified. See the SAI for
more information.
Many of the Fund's shareholders receive their distributions in
the form of additional shares. This is a convenient way to
accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so acquired
remain at market risk.
Distributions in Cash
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected distributions
to another fund in the Franklin Group of Funds or the Templeton
Funds, to another person, or directly to a checking account. If
the bank at which the account is maintained is a member of the
Automated Clearing House, the payments may be made automatically
by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be
sent to the address of record. Additional information regarding
automated fund transfers may be obtained from Franklin's
Shareholder Services Department. Dividend and capital gain
distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Funds at net asset
value. See "Purchases at Net Asset Value" under "How to Buy
Shares of the Fund."
Taxation of the Fund and Its Shareholders
The following discussion reflects some of the tax considerations
that affect mutual funds and their shareholders. Additional
information on tax matters relating to the Fund and its
shareholders is included in the section entitled "Additional
Information Regarding Taxation" in the SAI.
The Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, qualified as such, and
intends to continue to so qualify. By distributing all of its
income and meeting certain other requirements relating to the
sources of its income and diversification of its assets, the Fund
will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the
shareholder receives from the Fund, as well as any distributions
derived from the excess of net short-term capital gain over net
long-term capital loss, are treated as ordinary income whether
the shareholder has elected to receive them in cash or in
additional shares. Distributions derived from the excess of net
long-term capital gain over net short-term capital loss are
treated as long-term capital gain regardless of the length of
time the shareholder has owned Fund shares and regardless of
whether such distributions are received in cash or in additional
shares.
It is not expected that distributions paid by the Fund will
qualify for the corporate dividends-received deduction.
Pursuant to the Code, certain distributions which are declared in
October, November or December but which, for operational reasons,
may not be paid to the shareholder until the following January,
will be treated for tax purposes as if received by the
shareholder on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on
which a shareholder may realize a gain or loss. Any loss incurred
on sale or exchange of the Fund's shares, held for six months or
less, will be treated as a long-term capital loss to the extent
of capital gain dividends received with respect to such shares.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid and will
promptly after the close of each calendar year advise
shareholders of the tax status for federal income tax purposes of
such dividends and distributions.
Many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by the
Fund from direct obligations of the U.S. government. Investments
in mortgage-backed securities (including GNMA, FNMA and FHLMC
securities) and repurchase agreements collateralized by U.S.
government securities do not qualify as direct federal
obligations in most states.
Shareholders should consult with their own tax advisors with
respect to the applicability of state and local intangible
property or income taxes on their shares of the Fund and
distributions and redemption proceeds received from the Fund.
Shareholders who are not U.S. persons for purposes of federal
income taxation should consult with their financial or tax
advisors regarding the applicability of U.S. withholding or other
taxes to distributions received by them from the Fund and the
application of foreign tax laws to these distributions.
How to Buy Shares of the Fund
Shares of the Fund are continuously offered through securities
dealers which execute an agreement with Distributors, the
principal underwriter of the Fund's shares. The use of the term
"securities dealer" shall include other financial institutions
which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the
Fund. Such reference however is for convenience only and does
not indicate a legal conclusion of capacity. The minimum initial
investment is $100 and subsequent investments must be $25 or
more. These minimums may be waived when the shares are purchased
through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for
the purchase of shares. The Fund may impose a $10 charge for each
returned item , against any shareholder account which, in
connection with the purchase of Fund shares, submits a check or a
draft which is returned unpaid to the Fund.
Purchase Price of Fund Shares
Shares of the Fund are offered at the public offering price,
which is the net asset value per share plus a sales charge, next
computed (1) after the shareholder's securities dealer receives
the order which is promptly transmitted to the Fund or (2) after
receipt of an order by mail from the shareholder directly in
proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge
is a variable percentage of the offering price, depending upon
the amount of the sale. On orders for 100,000 shares or more, the
offering price will be calculated to four decimal places. On
orders for less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset
value per share is included under the caption "Valuation of Fund
Shares."
Set forth below is a table of total sales charges or underwriting
commissions and dealer concessions:
Total Sales Charge
Dealer
Concession
As a as a
As a Percentage Percentage
Percentage of Net of
Size of Transaction of Offering Amount Offering
at Offering Price Price Invested Price*
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
There is no sales charge on purchases of $1,000,000 or more.
The size of a transaction which determines the applicable sales
charge on the purchase of Fund shares is determined by adding the
amount of the shareholder's current purchase plus the cost or
current value (whichever is higher) of a shareholder's existing
investment in one or more of the funds in the Franklin Group of
Funds and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin
Group of Funds except Franklin Valuemark Funds and Franklin
Government Securities Trust (the "Franklin Funds"), (b) other
investment products underwritten by Distributors or its
affiliates (although certain investments may not have the same
schedule of sales charges and/or may not be subject to reduction)
and (c) the U.S. mutual funds in the Templeton Group of Funds
except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds").
(Franklin Funds and Templeton Funds are collectively referred to
as the "Franklin Templeton Funds"). Purchases pursuant to a
Letter of Intent for $1,000,000 or more will bear no sales
charge. Purchases pursuant to the Rights of Accumulation will be
at the applicable sales charge of 2.15% or more until the
additional purchase, plus the value of the account or the amount
previously invested, less redemptions, exceeds $1,000,000. Sales
charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective
only after notification to Distributors that the investment
qualifies for a discount.
Distributors, or one of its affiliates, out of its own resources,
may also provide additional compensation to dealers in connection
with sales of shares in the Franklin Templeton Funds.
Compensation may include financial assistance to dealers in
connection with conferences, sales or training programs for their
employees, seminars for the public, advertising, sales campaigns
and/or shareholder services and programs regarding the Franklin
Templeton Funds and other dealer-sponsored programs or events. In
some instances, this compensation may be made available only to
certain securities dealers whose representatives have sold or are
expected to sell significant amounts of such shares. Compensation
may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered
representatives and members of their families to locations within
or outside of the United States for meetings or seminars of a
business nature. Dealers may not use sales of the Fund's shares
to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory
agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned additional compensation is paid
for by the Fund or its shareholders.
Certain officers and trustees of the Fund are also affiliated
with Distributors. A detailed description is included in the SAI.
Quantity Discounts in Sales Charges
Shares may be purchased under a variety of plans which provide
for a reduced sales charge. To be certain to obtain the reduction
of the sales charge, the investor or the dealer should notify
Distributors at the time of each purchase of shares which
qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, any Franklin Templeton
Investments may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be considered
in determining whether a reduced sales charge is available, even
though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a
reduction in the sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever
is higher) of existing investments in Franklin Templeton
Investments may be combined with the amount of the current
purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a
reduced sales charge on a purchase of shares of the Fund by
completing the Letter of Intent section of the Shareholder
Application (the "Letter of Intent" or "Letter"). By completing
the Letter, the investor expresses an intention to invest during
the next 13 months a specified amount which if made at one time
would qualify for a reduced sales charge and grants to
Distributors a security interest in the reserved shares and
irrevocably appoints Distributors as attorney-in-fact with full
power of substitution to surrender for redemption any or all
shares for the purpose of paying any additional sales charge due.
Purchases under the Letter will conform with the requirements of
Rule 22d-1 under the 1940 Act. The investor or the investor's
securities dealer must inform Investor Services or Distributors
that this Letter is in effect each time a purchase is made.
An investor acknowledges and agrees to the following provisions
by completing the Letter of Intent section of the Shareholder
Application: Five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund,
registered in the investor's name, to assure that the full
applicable sales charge will be paid if the intended purchase is
not completed. The reserved shares will be included in the total
shares owned as reflected on periodic statements; income and
capital gain distributions on the reserved shares will be paid as
directed by the investor. The reserved shares will not be
available for disposal by the investor until the Letter of Intent
has been completed or the higher sales charge paid. For more
information, see "Additional Information Regarding Purchases" in
the SAI.
Group Purchases
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is based
upon the aggregate dollar value of shares previously purchased
and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously
invested and still held $80,000 of Fund shares and now were
investing $25,000, the sales charge would be 3.50%. Information
concerning the current sales charge applicable to a group may be
obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for
more than six months, (ii) has a purpose other than acquiring
Fund shares at a discount, and (iii) satisfies uniform criteria
which enable Distributors to realize economies of scale in its
costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings
between representatives of the Fund or Distributors and the
members, agree to include sales and other materials related to
the Fund in its publications and mailings to members at reduced
or no cost to Distributors, and seek to arrange for payroll
deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such time
as the investor notifies the Fund and the investor's employer to
discontinue further investments. Due to the varying procedures
used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of
the payroll deduction and the time the money reaches the Fund.
The investment in the Fund will be made at the offering price per
share determined on the day that both the check and payroll
deduction data are received in required form by the Fund.
Purchases at Net Asset Value
Shares of the Fund may be purchased at net asset value by certain
employee benefit plans qualified under Section 401 of the Code,
including salary reduction plans qualified under Section 401(k)
of the Code, subject to 1) the employer establishing the plan
having 200 or more employees, or 2) the amount invested or to be
invested during the subsequent 13-month period in the Fund or
other mutual fund(s) in the Franklin Templeton Investments
totaling at least $1,000,000. Employee benefit plans not
qualified under Section 401 of the Code may be afforded the same
privilege if they meet the above requirements as well as the
uniform criteria for qualified groups previously described under
"Group Purchases." If investments made by employee benefit plans
at net asset value are made through a dealer who has executed a
dealer agreement with Distributors, Distributors or one of its
affiliates, may make a payment, out of their own resources, to
such dealer in an amount not to exceed 1% of the amount invested.
Shares of the Fund may be purchased at net asset value (without a
sales charge) by (1) officers, trustees, directors, and full-time
employees of the Fund, any of the Franklin Templeton Funds, or of
the Franklin Templeton Group, and by their spouses and family
members; (2) companies exchanging shares with or selling assets
pursuant to a merger, acquisition or exchange offer; (3)
insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5)
shareholders of Templeton Institutional Funds, Inc. reinvesting
redemption proceeds from that fund under an employee benefit plan
qualified under Section 401 of the Internal Revenue Code of 1986,
as amended, in shares of the Fund; (6) certain unit investment
trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered
securities dealers and their affiliates, for their investment
account only, and (8) registered personnel and employees of
securities dealers, which have directly or through affiliates,
signed an agreement with Distributors, and by their spouses and
family members, in accordance with the internal policies and
procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by trust
companies and bank trust departments for funds over which they
exercise exclusive discretionary investment authority and which
are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with
respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount
invested or to be invested during the subsequent 13-month period
in this Fund or any of the Franklin Templeton Investments must
total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other
means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of
business on the next business day following such order. If an
investment by a trust company or bank trust department at net
asset value is made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its
affiliates may make payment, out of their own resources, to such
dealer in an amount not to exceed 0.25% of the amount invested.
Contact Franklin's Institutional Sales Department for additional
information.
Shares of the Fund may be purchased at net asset value by persons
who have redeemed, within the previous 120 days, their shares of
the Fund or another of the Franklin Templeton Funds which were
purchased with a front-end or contingent deferred sales charge.
An investor may reinvest an amount not exceeding the redemption
proceeds. Credit will be given for any contingent deferred sales
charge paid on the shares redeemed. Shares of the Fund redeemed
in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In
order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or
the Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value
may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there
has been a loss on the redemption, the loss may be disallowed if
a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus
and the SAI.
Dividends and capital gains received in cash by the shareholder
may also be used to purchase shares of the Fund or another of the
Franklin Templeton Funds at net asset value within 120 days of
the payment date of such distribution. To exercise this
privilege, .a.written request to reinvest the distribution must
accompany the purchase orderAdditional information may be
obtained from Shareholder Services at 1-800/632-2301. See
"Distributions in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value by
investors who have, within the past 60 days, redeemed an
investment in an unaffiliated mutual fund which charged the
investor a contingent deferred sales charge upon redemption and
which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value by anyone
who has taken a distribution from an existing retirement plan
already invested in the Franklin Templeton Funds (including
former participants of the Franklin Templeton Profit Sharing
401(k) plan) to the extent of such distribution. In order to
exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin/Templeton Trust
Company ("Trust Company"), the Fund or Investor Services, within
120 days after the plan distribution. A prospectus outlining the
investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll free
at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value by
any state, county, or city, or any instrumentality, department,
authority or agency thereof which has determined that the Fund is
a legally permissible investment and which is prohibited by
applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any
registered management investment company ("an eligible
governmental authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN
LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES
OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal
investors considering investment of proceeds of bond offerings
into the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net asset
value is made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to
such dealer in an amount not to exceed 0.25% of the amount
invested. Contact Franklin's Institutional Sales Department for
additional information.
Shares of the Fund may be purchased at net asset value by
registered investment advisors and/or their affiliated broker-
dealers, who have entered into a supplemental agreement with
Distributors, on behalf of their clients who are participating in
a comprehensive fee program (also known as a wrap fee program).
General
Securities laws of states in which the Fund's shares are offered
for sale may differ from the interpretations of federal law, and
banks and financial institutions selling Fund shares may be
required to register as dealers pursuant to state law.
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments
Shares of the Fund may be used for retirement programs providing
for tax-deferred investments for both individuals and businesses.
The Fund may be used as an investment vehicle for an existing
retirement plan, or Trust Company may provide the plan documents
and trustee or custodian services. A plan document must be
adopted in order for a plan to be in existence.
Trust Company, an affiliate of Distributors, can serve as
custodian or trustee for various types of retirement plans.
Brochures for each of the plans sponsored by Franklin contain
important information regarding eligibility, contribution limits
and IRS requirements. Please note that the separate applications
other than the one contained in this Prospectus must be used to
establish an Trust Company retirement account. To obtain a
retirement plan brochure or application, call toll free 1-
800/DIAL BEN (1-800/342-5236).
The Franklin Templeton IRA is an individual retirement account in
which the contributions, annually limited to the lesser of $2,000
or 100% of an individual's earned compensation, accumulate on a
tax-deferred basis until withdrawn. Under the current tax law,
individuals who (or whose spouses) are covered by a company
retirement plan (termed "active participants") may be restricted
in the amount they may claim as an IRA deduction on their
returns. The IRA deduction is gradually reduced to the extent
that a taxpayer's adjusted gross income exceeds certain specified
limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned
compensation, may be established by a married couple in which
only one spouse is a wage earner. The $2,250 may be split between
the two IRAs, so long as no more than $2,000 is contributed to
either one for a given tax year.
A Franklin Rollover IRA account is designed to maintain the tax-
deferred status of a qualifying distribution from an employer-
sponsored retirement plan, such as a 401(k) plan or qualified
pension plan. Additionally, if the eligible distribution is
directly transferred to a rollover IRA account, the distribution
will be exempt from 20% mandatory federal withholding.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and
Salary Reduction Simplified Employee Pension Plan (SAR-SEP) are
for use by small businesses (generally 25 or fewer employees) to
provide a retirement plan for their employees and, at the same
time, provide for a tax-deduction to the employer. SEP-IRA
contributions are made to an employee's IRA, at the discretion of
the employer, up to the lesser of $30,000 or 15% of compensation*
per employee. The SAR-SEP allows employees to contribute a
portion of their salary to an IRA on a pre-tax basis through
salary deferrals. The maximum annual salary deferral limit for a
SAR-SEP is the lesser of 15% of compensation (adjusted for
deferrals) or $9,240 (1995 limit; indexed for inflation).
The Franklin Templeton 403(b) Retirement Plan is a salary
deferral plan for employees of certain non-profit and educational
institutions [501(c)(3) organizations and public schools]. The
403(b) Plan allows participants to determine the annual amount of
salary they wish to defer. The maximum annual salary deferral
amount is generally the lesser of 25% of compensation (adjusted
for deferrals) or $9,500.
The Franklin Business Retirement Plans provide employers with
additional retirement plan options and may be used individually,
in combination, or with custom designed features. The Profit
Sharing Plan allows an employer to make contributions, at its
discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension
Plan allows the employer to contribute up to the lesser of
$30,000 or 25% of compensation* per employee; however,
contributions are required annually at the rate (percentage)
elected by the employer at the outset of the plan. In order to
achieve a combined contribution rate of 25% while maintaining a
certain degree of flexibility, employers may establish both a
Profit Sharing Plan and a Money Purchase Pension Plan (with a
fixed contribution rate of 10%).
Trust Company can add optional provisions to the Profit Sharing
and Money Purchase Pension Plans described above and provide a
Defined Benefit, Target Benefit, and 401(k) Plans on a custom
designed basis. Business Retirement Plans, whether standard or
custom designed, may require an annual report (Form 5500) to be
filed with the IRS.
Redemptions from any Franklin retirement plan accounts require
the completion of specific distribution forms to comply with IRS
regulations. Please see "How to Sell Shares of the Fund."
Individuals and employers should consult with a competent tax or
financial advisor before choosing a retirement plan.
* The limit on compensation for determining SEP and qualified
plan contributions was reduced from $235,840 in 1993 to $150,000
for 1994 and 1995. The $150,000 limit will be adjusted for
inflation, but only in $10,000 increments.
Other Programs and Privileges
Available to Fund Shareholders
Certain of the programs and privileges described in this section
may not be available directly from the Fund to shareholders whose
shares are held, of record, by a financial institution or in a
"street name" account or networked account through the National
Securities Clearing Corporation ("NSCC") (see the section
captioned "Account Registrations" in this Prospectus).
Share Certificates
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and capital
gain distributions, are generally credited to an account in the
name of an investor on the books of the Fund without the issuance
of a share certificate. Maintaining shares in uncertificated form
(also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed
certificate cannot be replaced without obtaining a sufficient
indemnity bond. The cost of such a bond, which is generally borne
by the shareholder, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if
requested in writing by the shareholder or by the securities
dealer.
Confirmations
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that period
and after each other transaction which affects the shareholder's
account. This statement will also show the total number of shares
owned by the shareholder, including the number of shares in "plan
balance" for the account of the shareholder.
Automatic Investment Plan
Under the Automatic Investment Plan, a shareholder may be able to
arrange to make additional purchases of shares automatically on a
monthly basis by electronic funds transfer from a checking
account, if the bank which maintains the account is a member of
the Automated Clearing House, or by preauthorized checks drawn on
the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application
included with this Prospectus contains the requirements
applicable to this program. In addition, shareholders may obtain
more information concerning this program from their securities
dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation.
Before undertaking any plan for systematic investment, the
investor should keep in mind that such a program does not assure
a profit or protect against a loss.
Systematic Withdrawal Plan
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided that
the net asset value of the shares held by the shareholder is at
least $5,000. There are no service charges for establishing or
maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal
transaction although this is merely the minimum amount allowed
under the plan and should not be mistaken for a recommended
amount. The plan may be established on a monthly, quarterly,
semiannual or annual basis. If the shareholder establishes a
plan, any capital gain distributions and income dividends paid by
the Fund will be reinvested for the shareholder's account in
additional shares at net asset value. Payments will then be made
from the liquidation of shares at net asset value on the day of
the transaction (which is generally the first business day of the
month in which the payment is scheduled) with payment generally
received by the shareholder three to five days after the date of
liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected
withdrawals to another fund in the Franklin Templeton Funds, to
another person, or directly to a checking account. If the bank at
which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the
shareholder should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to the
address of record. Liquidation of shares may reduce or possibly
exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and
distributions, particularly in the event of a market decline. If
the withdrawal amount exceeds the total plan balance, the account
will be closed and the remaining balance will be sent to the
shareholder. As with other redemptions, a liquidation to make a
withdrawal payment is a sale for federal income tax purposes.
Because the amount withdrawn under the plan may be more than the
shareholder's actual yield or income, part of the payment may be
a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with
purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the additional
purchases. The shareholder should ordinarily not make additional
investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in
effect. A Systematic Withdrawal Plan may be terminated on written
notice by the shareholder or the Fund, and it will terminate
automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death
or incapacity of the shareholder. Shareholders may change the
amount (but not below the specified minimum) and schedule of
withdrawal payments or suspend one such payment by giving written
notice to Investor Services at least seven business days prior to
the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan
is in effect.
Institutional Accounts
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds
with various investment objectives or policies. The shares of
most of these mutual funds are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for
the securities markets changes, the Fund shares may be exchanged
for shares of other Franklin Templeton Funds which are eligible
for sale in the shareholder's state of residence and in
conformity with such fund's stated eligibility requirements and
investment minimums. Investors should review the prospectus of
the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on
excercising the exchange privilege, for example, minimum holding
periods or applicable sales charges. Exchanges may be made in
any of the following ways:
Exchanges By Mail
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of the
written instructions together with any outstanding share
certificates.
Exchanges By Telephone
Shareholders, or their investment representative of record, if
any, may exchange shares of the Fund by telephone by calling
Investors Services at 1-800/632-2301 or the automated Franklin
TeleFACTS" system (day or night) at 1-800/247-1753. If the
shareholder does not wish this privilege extended to a particular
account, the Fund or Investor Services should be notified.
The Telephone Exchange Privilege allows a shareholder to effect
exchanges from the Fund into an identically registered account in
one of the other available Franklin Templeton Funds. The
Telephone Exchange Privilege is available only for uncertificated
shares or those which have previously been deposited in the
shareholder's account. The Fund and Investor Services will employ
reasonable procedures to confirm that instructions communicated
by telephone are genuine. Please refer to "Telephone Transactions
- - Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be difficult
to implement and the eleFACTS option may not be available. In
this event, shareholders should follow the other exchange
procedures discussed in this section, including the procedures
for processing exchanges through securities dealers.
Exchanges Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's
shares, Investor Services will accept exchange orders by
telephone or by other means of electronic transmission from
securities dealers who execute a dealer or similar agreement with
Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated
shares on deposit in the shareholder's account or for which
certificates have previously been deposited. A securities dealer
may charge a fee for handling an exchange.
Additional Information Regarding Exchanges
Exchanges are made on the basis of the net asset values of the
funds involved, except as set forth below. Exchanges of shares of
the Fund which were purchased without a sales charge will be
charged a sales charge in accordance with the terms of the
prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on
which the investor paid a sales charge. Exchanges of shares of
the Fund which were purchased with a lower sales charge to a fund
which has a higher sales charge will be charged the difference,
unless the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, accrued but
unpaid income dividends and capital gain distributions will be
reinvested in the Fund at the net asset value on the date of the
exchange, and then the entire share balance will be exchanged
into the new fund in accordance with the procedures set forth
above. Because the exchange is considered a redemption and
purchase of shares, the shareholder may realize a gain or loss
for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the
possible tax consequences of such an exchange is included in the
tax section in this Prospectus and in the SAI.
There are differences among the Franklin Templeton Funds. Before
making an exchange, a shareholder should obtain and review a
current prospectus of the fund into which the shareholder wishes
to transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the Fund
pursuant to the exchange privilege, the Fund might have to
liquidate portfolio securities it might otherwise hold and incur
the additional costs related to such transactions. On the other
hand, increased use of the exchange privilege may result in
periodic large inflows of money. If this should occur, it is the
general policy of the Fund to initially invest this money in
short-term, interest-bearing money market instruments, unless it
is felt that attractive investment opportunities consistent with
the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a
manner as is possible when attractive investment opportunities
arise.
The Exchange Privilege may be modified or discontinued by the
Fund at any time upon 60 days' written notice to shareholders.
Retirement Accounts
Franklin Templeton IRA and 403(b) retirement accounts may
accomplish exchanges directly. Certain restrictions may apply,
however, to other types of retirement plans. See "Restricted
Accounts" under "Telephone Transactions."
Timing Accounts
Accounts which are administered by allocation or market timing
services to purchase or redeem shares based on predetermined
market indicators ("Timing Accounts") will be charged a $5.00
administrative service fee per each such exchange. All other
exchanges are without charge.
Restrictions on Exchanges
In accordance with the terms of their respective prospectuses,
certain funds do not accept or may place differing limitations
than those below on exchanges by Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific purchase
order for any Timing Account or any person whose transactions
seem to follow a timing pattern who: (i) make an exchange
request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) make more than two exchanges out
of the Fund per calendar quarter, or (iii) exchange shares equal
in value to at least $5 million, or more than 1/4 of 1% of the
Fund's net assets. Accounts under common ownership or control,
including accounts administered so as to redeem or purchase
shares based upon certain predetermined market indicators, will
be aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of
exchange requests by any Timing Account, person, or group if, in
the Manager's judgment, the Fund would be unable to invest
effectively in accordance with its investment objectives and
policies, or would otherwise potentially be adversely affected.
A shareholder's purchase exchanges may be restricted or refused
if the Fund receives or anticipates simultaneous orders affecting
significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincide with a "market timing"
strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order for
the purchase of shares.
How to Sell Shares of the Fund
A shareholder may at any time liquidate shares owned and receive
from the Fund the value of the shares. Shares may be redeemed in
any of the following ways:
Redemptions by Mail:
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of this
Prospectus, and any share certificates which have been issued for
the shares being redeemed, properly endorsed and in order for
transfer. The shareholder will then receive from the Fund the
value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by
Investor Services. Redemption requests received after the time at
which the net asset value is calculated (1:00 p.m. Pacific time)
each day that the New York Stock Exchange (the "Exchange") is
open for business will receive the price calculated on the
following business day. Shareholders are requested to provide a
telephone number(s) where they may be reached during business
hours, or in the evening if preferred. Investor Services' ability
to contact a shareholder promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signature(s) must be guaranteed
if the redemption request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other
than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address
other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess
of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based on
the transfer instructions, including, for example, when (a)
the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c)
the Fund has been notified of an adverse claim, (d) the
instructions received by the Fund are given by an agent, not
the actual registered owner, (e) the Fund determines that
joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the
authority of a representative of a corporation, partnership,
association, or other entity has not been established to the
satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the Securities
Exchange Act of 1934. Generally, eligible guarantor institutions
include (1) national or state banks, savings associations,
savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national
securities exchanges, registered securities associations and
clearing agencies; (3) securities dealers which are members of a
national securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that
participate in the Securities Transfer Agent Medallion Program
("STAMP") or other recognized signature guarantee medallion
program. A notarized signature will not be sufficient for the
request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied by
the share certificate and a share assignment form signed by the
registered shareholders exactly as the account is registered,
with the signature(s) guaranteed as referenced above.
Shareholders are advised, for their own protection, to send the
share certificate and assignment form in separate envelopes if
they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court jurisdiction
require the following documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from
the authorized officer(s) of the corporation and (2) a corporate
resolution.
Partnership - (1) Signature guaranteed letter of instruction from
a general partner and (2) pertinent pages from the partnership
agreement identifying the general partners or a certification for
a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the
trustee(s) and (2) a copy of the pertinent pages of the trust
document listing the trustee(s) or a Certification for Trust if
the trustee(s) are not listed on the account registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the
applicable state law since these accounts have varying
requirements, depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper form.
Redemptions by Telephone
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"), included
with this Prospectus, may redeem shares of the Fund by telephone,
subject to the Restricted Account exception noted under
"Telephone Transactions - Restricted Accounts. Information may
also be obtained by writing to the Fund or Investor Services at
the address shown on the cover or by calling 1-800/632-2301. The
Fund and Investor Services will employ reasonable procedures to
confirm that instructions given by telephone are genuine.
Shareholders, however, bear the risk of loss in certain cases as
described under "Telephone Transactions - Verification
Procedures."
For shareholder accounts with the completed Agreement on file,
redemptions of uncertificated shares or shares which have
previously been deposited with the Fund or Investor Services may
be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before 1:00 p.m. Pacific time on any
business day will be processed that same day. The redemption
check will be sent within seven days, made payable to all the
registered owners on the account, and will be sent only to the
address of record. Redemption requests by telephone will not be
accepted within 30 days following an address change by telephone.
In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, government
entities, and qualified retirement plans which qualify to
purchase shares at net asset value pursuant to the terms of this
Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges
Agreement which is available from Franklin's Institutional
Services Department by telephoning 1-800/321-8563.
Redeeming Shares Through Securities Dealers
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities dealers who have
entered into a dealer or similar agreement with Distributors.
This is known as a repurchase. The only difference between a
normal redemption and a repurchase is that if the shareholder
redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer
receives the order which is promptly transmitted to the Fund,
rather than on the day the Fund receives the shareholder's
written request in proper form. These documents, as described in
the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. After receipt
of a repurchase order from the dealer, the Fund will still
require a signed letter of instruction and all other documents
set forth above. A shareholder's letter should reference the
Fund, the account number, the fact that the repurchase was
ordered by a dealer, and the dealer's name. Details of the dealer-
ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of the
shareholder's redemption will be sent will begin when the Fund
receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle the
repurchase. Thus, it is in a shareholder's best interest to have
the required documentation completed and forwarded to the Fund as
soon as possible. The shareholder's dealer may charge a fee for
handling the order. The SAI contains more information on the
redemption of shares.
Additional Information Regarding Redemptions
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used to
purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will generally
reduce this delay, shares purchased with these checks will also
be held pending clearance. Shares purchased by federal funds wire
are available for immediate redemption. In addition, the right of
redemption may be suspended or the date of payment postponed if
the Exchange is closed (other than customary closing), or upon
the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by
order, for the protection of shareholders. Of course, the amount
received may be more or less than the amount invested by the
shareholder, depending on fluctuations in the market value of
securities owned by the Fund.
Retirement Accounts
Retirement account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To
liquidate a retirement account, a shareholder or securities
dealer may call Franklin's Retirement Plans Department to obtain
the necessary forms.
Other
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services Department
or the securities dealer may call Franklin's Dealer Services
Department.
Telephone Transactions
Shareholders of the Fund and their investment representative of
record, if any, may be able to execute various transactions by
calling Investor Services at 1-800/632-2301.
All shareholders will be able to: (i) effect a change in address,
(ii) change a dividend option (see "Restricted Accounts" below),
(iii) transfer Fund shares in one account to another identically
registered account in the Fund, and (iv) exchange Fund shares as
described in this Prospectus by telephone. In addition,
shareholders who complete and file an Agreement as described
under "How to Sell Shares of the Fund - Redemptions by Telephone"
will be able to redeem shares of the Fund.
Verification Procedures
The Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are
genuine. These will include: recording all telephone calls
requesting account activity by telephone, requiring that the
caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call
for the purpose of establishing the caller's identification, and
by sending a confirmation statement on redemptions to the address
of record each time account activity is initiated by telephone.
So long as the Fund and Investor Services follow instructions
communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the shareholder caused
by an unauthorized transaction. Shareholders are, of course,
under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services
is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be
executed, and neither the Fund nor Investor Services will be
liable for any losses which may occur because of a delay in
implementing a transaction.
Restricted Accounts
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To assure
compliance with all applicable regulations, special forms are
required for any distribution, redemption, or dividend payment.
While the telephone exchange privilege is extended to Franklin
Templeton IRA and 403(b) retirement accounts, certain
restrictions may apply to other types of retirement plans.
Changes to dividend options must also be made in writing.
To obtain further information regarding distribution or transfer
procedures, including any required forms, retirement account
shareholders may call to speak to a Retirement Plan Specialist at
1-800/527-2020 for Franklin accounts or 1-800/354-9191 (press "2"
when prompted to do so) for Templeton accounts.
General
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will be
difficult to execute because of heavy telephone volume. In such
situations, shareholders may wish to contact their investment
representative for assistance, or to send written instructions to
the Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any
losses resulting from the inability of a shareholder to execute a
telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written notice
to shareholders.
Valuation of Fund Shares
The net asset value per share of the Fund is determined as of
1:00 p.m. Pacific time each day that the Exchange is open for
trading. Many newspapers carry daily quotations of the prior
trading day's closing "bid" (net asset value) and "ask" (offering
price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the
following manner: The aggregate of all liabilities, including,
without limitation, the current market value of any outstanding
options written by the Fund, accrued expenses and taxes and any
necessary reserves, is deducted from the aggregate gross value of
all assets, and the difference is divided by the number of shares
of the Fund outstanding at the time. For the purpose of
determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is
recorded as accrued. Under procedures approved by the Board of
Trustees, the mortgage securities of the Fund are valued at
current market value provided by a pricing service, bank or
securities dealer when over-the-counter market quotations are
readily available. Securities and other assets for which market
prices are not readily available are valued at fair market value
as determined following procedures approved by the Board of
Trustees.
All money market instruments with a maturity of more than 60 days
are valued at current market, as discussed above. All money
market instruments with a maturity of 60 days or less are valued
at their amortized cost, which the Board of Trustees has
determined in good faith constitutes fair value for purposes of
complying with the 1940 Act. This valuation method will continue
to be used until such time as the trustees determine that it does
not constitute fair value for such purposes.
How to Get Information Regarding an Investment in the Fund
Any questions or communications regarding a shareholder's account
should be directed to Investor Services at the address shown on
the back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current price,
yield or performance information specific to a fund in the
Franklin Funds by calling the automated Franklin TeleFACTS system
(day or night) at 1-800/247-1753. Information about the Fund may
be accessed by entering Fund Code 57 followed by the # sign, when
requested to do so by the automated operator. The TeleFACTS
system is also available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to speak
directly with a representative, the following is a list of the
various Franklin departments, telephone numbers and hours of
operation to call. The same numbers may be used when calling from
a rotary phone:
Hours of Operation
(Pacific time
Department Name Telephone No. Monday through Friday)
Shareholder 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing
impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in
Franklin's service departments may be accessed, recorded and
monitored. These calls can be determined by the presence of a
regular beeping tone.
Performance
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions of
total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of $1,000
invested at the maximum public offering price (offering price
includes sales charge) for one-, five- and ten-year periods, or
portion thereof, to the extent applicable, through the end of the
most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations
for other periods or based on investments at various sales charge
levels or at net asset value. For such purposes, total return
equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus
(or minus) the change in the value of the original investment,
expressed as a percentage of the purchase price.
Current yield reflects the income per share earned by the Fund's
portfolio investments; it is calculated by dividing the Fund's
net investment income per share during a recent 30-day period by
the maximum public offering price on the last day of that period
and annualizing the result.
Yield, which is calculated according to a formula prescribed by
the SEC (see the SAI), is not indicative of the dividends or
distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders are
reflected in the current distribution rate, which may be quoted
to shareholders. The current distribution rate is computed by
dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price.
Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. The
current distribution rate differs from the current yield
computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium
income from option writing and short-term capital gain, and is
calculated over a different period of time.
In each case, performance figures are based upon past
performance, reflect all recurring charges against Fund income
and will assume the payment of the maximum sales charge on the
purchase of shares. When there has been a change in the sales
charge structure, the historical performance figures will be
restated to reflect the new rate. The investment results of the
Fund, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Fund's yield, distribution rate or total return may be in any
future period.
General Information
Reports to Shareholders
The Fund's fiscal year ends September 30. Annual Reports
containing audited financial statements of the Fund, including
the auditors' report, and Semi-Annual Reports containing
unaudited financial statements are automatically sent to
shareholders. Additional copies may be obtained, without charge,
upon request to the Fund at the telephone number or address set
forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the
Fund's Annual Report to Shareholders and the SAI.
Organization
The Fund is authorized to issue an unlimited number of shares of
beneficial interest, with a par value of $.01 per share in
various series. All shares have one vote and, when issued, are
fully paid, non-assessable, and redeemable. Currently, one series
is offered by the Fund. Additional series may be added in the
future by the Board of Trustees, the assets and liabilities of
which will be separate and distinct from any other series.
Voting Rights
All shares of the Fund have equal voting, dividend and
liquidation rights. Shares of a series vote separately as to
issues affecting that series, unless otherwise permitted by the
1940 Act. The shares have noncumulative voting rights, which
means that holders of more than 50% of the shares voting for the
election of trustees can elect 100% of the trustees if they
choose to do so. The Fund does not intend to hold annual
shareholders meetings; it may, however, hold a meeting for such
purposes as changing fundamental investment restrictions,
approving a new management agreement or any other matters which
are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Trustees
or by shareholders holding at least ten percent of the shares
entitled to vote at the meeting. Shareholders may receive
assistance in communicating with other shareholders in connection
with the election or removal of trustees such as that provided in
Section 16(c) of the 1940 Act.
Redemptions by the Fund
The Fund reserves the right to redeem, at net asset value, shares
of any shareholder whose account has a value of less than $50,
but only where the value of such account has been reduced by the
shareholder's prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a
period of at least six months, provided advance notice is given
to the shareholder. More information is included in the SAI.
Other Information
Distribution or redemption checks sent to shareholders do not
earn interest or any other income during the time such checks
remain uncashed and neither the Fund nor its affiliates will be
liable for any loss to the shareholder caused by the
shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft
or wire. The Fund has no facility to receive, or pay out, cash in
the form of currency.
As of November 3, 1994, Franklin Resources, Inc. owned 99.9% of
the Fund's outstanding shares.
Additional Information for Institutional Investors
Since the investments permitted by the Fund's policies are
primarily in mortgage securities issued or guaranteed by the U.S.
government or its agencies and instrumentalities, the shares of
the Fund may be eligible for investment by federally chartered
credit unions, federally chartered savings and loan associations
and national banks. The Fund may be a permissible investment for
certain state chartered institutions as well, including state and
local government authorities and agencies. Any financial
institution considering an investment in the Fund should refer to
the applicable laws and regulations governing their operations in
order to determine if this Fund is a permissible investment.
Account Registrations
An account registration should reflect the investor's intentions
as to ownership. Where there are two co-owners on the account,
the account will be registered as "Owner 1" and "Owner 2"; the
"or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or
convert on the signature of only one owner, a limited power of
attorney may be used.
Accounts should not be registered in the name of a minor, either
as sole or co-owner of the account. Transfer or redemption for
such an account may require court action to obtain release of the
funds until the minor reaches the legal age of majority. The
account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform
Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for" should
only be used if the account is being established pursuant to a
legal, valid trust document. Use of such a designation in the
absence of a legal trust document may cause difficulties and
require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint
tenants or "Jt Ten" shall mean "as joint tenants with rights of
survivorship" and not "as tenants in common."
Except as indicated, a shareholder may transfer an account in the
Fund carried in "street" or "nominee" name by the shareholder's
securities dealer to a comparably registered Fund account
maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements
on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not
process the transfer and will so inform the shareholder's
delivering securities dealer. To effect the transfer, a
shareholder should instruct the securities dealer to transfer
the account to a receiving securities dealer and sign any
documents required by the securities dealer(s) to evidence
consent to the transfer. Under current procedures, the account
transfer may be processed by the delivering securities dealer and
the Fund after the Fund receives authorization in proper form
from the shareholder's delivering securities dealer. In the
future it may be possible to effect such transfers electronically
through the services of the NSCC.
The Fund may conclusively accept instructions from an owner or
the owner's nominee listed in publicly available nominee lists,
regardless of whether the account was initially registered in the
name of or by the owner, the nominee, or both. If a securities
dealer or other representative is of record on an investor's
account, the investor will be deemed to have authorized the use
of electronic instructions on the account, including, without
limitation, those initiated through the services of the NSCC, to
have adopted as instruction and signature any such electronic
instructions received by the Fund and the Shareholder Services
Agent, and to have authorized them to execute the instructions
without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in
the near future, include the NSCC's "Networking," "Fund/SERV,"
and "ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment, or by
calling Franklin's Fund Information Department.
Important Notice Regarding
Taxpayer IRS Certifications
Pursuant to the Code and U.S. Treasury regulations, the Fund may
be required to report to the IRS any taxable dividend, capital
gain distribution, or other reportable payment (including share
redemption proceeds) and withhold 31% of any such payments made
to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and
made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to
backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding for
previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for
any person failing to provide a TIN along with the required
certifications and (2) close an account by redeeming its shares
in full at the then-current net asset value upon receipt of
notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a
shareholder who has completed an "awaiting TIN" certification to
provide the Fund with a certified TIN within 60 days after
opening the account.
Portfolio Operations
The following persons are primarily responsible for the day-to-
day management of the Fund's portfolio: Roger Bayston and Jack
Lemein since inception of the Fund and Victoria Lee since
September 1993.
Mr. Bayston, Portfolio Manager of FISCO, holds a Bachelor of
Science degree from the University of Virginia and a Master's
degree in Business Administration from the University of
California at Los Angeles. He has been with FISCO and the
Franklin organization since 1991 (following completion of his MBA
program) and was an Assistant Treasurer for Bankers Trust Company
from 1986 to 1989.
Mr. Lemein, Portfolio Manager of FISCO, holds a Bachelor of
Science degree in Finance from the University of Illinois. He has
been in the securities industry since 1967 and with the Franklin
organization since 1984. He is a member of several securities
industry associations.
Ms. Lee, Portfolio Manager of FISCO, holds a Bachelor of Science
degree from Cornell University and a Master's degree in Business
Administration from the University of Southern California. She
has been with FISCO since July 1993 (following completion of her
MBA program) and was a mortgage analyst with Bear Stearns from
1988 to 1991.
Franklin Strategic Mortgage Portfolio
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Investment Adviser
Franklin Institutional Services Corporation
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Principal Underwriter
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Custodian Franklin Strategic
Mortgage Portfolio
Bank of America NT & SA
555 California Street, 4th Floor Prospectus & Application
San Francisco, California 94104
February 1, 1995
Shareholder Services Agent
Franklin/Templeton Investor Services, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
Independent Auditors
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
Legal Counsel
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
For an enlarged version of this prospectus
please call 1-800/DIAL BEN.
Your Representative Is:
57 P 02/95
