As filed with the Securities and Exchange Commission on January 28, 1998.
File Nos.
33-53414
811-7288
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 6 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9 (X)
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
----------------------------------------
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
-------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(415) 312-2000
---------------
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
---------------------------------------------------------------
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on February 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities being Registered:
Shares of Beneficial Interest:
Franklin Strategic Mortgage Portfolio
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
- --------------------------------------------------------------------------
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?"; "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Legal Proceedings Not Applicable
STRATEGIC MORTGAGE PORTFOLIO
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
STATEMENT OF ADDITIONAL INFORMATION
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
- ----------------------------------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
INVESTMENT STRATEGY
GROWTH & INCOME
- ------------------------------------------------------------------------------
FEBRUARY 1, 1998
This prospectus describes the Franklin Strategic Mortgage Portfolio (the
"Fund"). It contains information you should know before investing in the Fund.
Please keep it for future reference.
The Fund has a Statement of Additional Information ("SAI"), dated February 1,
1998, which may be amended from time to time. It includes more information about
the Fund's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary............................................
Financial Highlights.......................................
How does the Fund Invest its Assets?.......................
What are the Fund's Potential Risks?.......................
Who Manages the Fund?......................................
How does the Fund Measure Performance?.....................
How Taxation Affects the Fund and its Shareholders.........
How is the Trust Organized?................................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?........................................
May I Exchange Shares for Shares of Another Fund?...........
How Do I Sell Shares?.......................................
What Distributions Might I Receive from the Fund?...........
Transaction Procedures and Special Requirements.............
Services to Help You Manage Your Account....................
What If I Have Questions About My Account?..................
GLOSSARY
Useful Terms and Definitions................................
- -----------------------------------------------------------------------------
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
February 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
September 30, 1997. The Fund's actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
MAXIMUM SALES CHARGE IMPOSED ON PURCHASES
(as a percentage of Offering Price) 4.25%++
Deferred Sales Charge None
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.40%**
Rule 12b-1 Fees None
Other Expenses 0.42%**
------------
Total Fund Operating Expenses 0.82%**
============
C. EXAMPLE
Assume the Fund's annual return is 5%, operating expenses are as described
above, and you sell your shares after the number of years shown. These are
the projected expenses for each $1,000 that you invest in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
$51 $68 $86 $140
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
THE FUND PAYS ITS OPERATING EXPENSES. The effects of these expenses are
reflected in its Net Asset Value or dividends and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, FISCO had agreed in advance to waive its management
fees and make certain payments to reduce the Fund's expenses. With this
reduction, the Fund did not pay management fees or other expenses.
FINANCIAL HIGHLIGHTS
- ----------------------------------------
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the periods shown below appears in the financial
statements in the Trust's Annual Report to Shareholders for the fiscal year
ended September 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
Year Ended September 30, 1997 1996 1995 1994 1993***
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the year)
Net Asset Value,
beginning of year
$9.74 $9.91 $9.42 $10.24 $10.00
-------------------------------------------------
Income from investment
operations:
Net investment income .708 .717 .714 .553 .365
Net realized and
unrealized gains (losses) .220 (.170) .490 (.711) .240
-------------------------------------------------
Total from investment
operations .928 .547 1.204 (.158) .605
-------------------------------------------------
Less distributions:
Dividends from net
investment income (.708) (.717) (.714) (.553) (.365)
Distributions from
net realized gains -- -- -- (.109) --
Total distributions (.708) (.717) (.714) (.662) (.365)
------------------------------------------------
Net Asset Value,
end of year $9.96 $9.74 $9.91 $9.42 $10.24
================================================
Total return+ 9.84% 5.69% 13.27% (1.61)% 6.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of year (000's) $8,934 $6,847 $5,980 $5,223 $5,306
Ratios to average net assets:
Expenses --% --% --% --% --%
Expenses excluding
waiver and payments
by affiliate .82% 1.11% 1.24% 1.28% 1.22%*
Net investment income 7.18% 7.26% 7.42% 5.65% 3.59%*
Portfolio turnover rate** 13.59% 17.64% 34.20 86.38% 104.33%
+Total return does not reflect sales commissions and is not annualized.
*Annualized.
**The portfolio turnover rate excludes mortgage dollar roll transactions.
***For the period February 1, 1993 (effective date) to September 30, 1993.
HOW DOES THE FUND INVEST ITS ASSETS?
- ---------------------------------------------------------
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective 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. Of course, there is no assurance that the Fund will
achieve its objective.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund seeks to achieve its objective through a combination of high income and
capital appreciation by investing at least 65% of its total assets in a
portfolio of mortgage securities created from pools of mortgages that 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 the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC").
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 adjustable rate mortgage securities
("ARMS"), collateralized mortgage obligations ("CMOs"), and stripped
mortgage-backed securities ("SMBS").
The Fund may also invest in obligations of the U.S. government; 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 investment in time deposits will not exceed 10% of its
total assets. The Fund may also invest in futures contracts and options on
future contracts.
For temporary defensive purposes only, when FISCO believes that market
conditions would cause serious erosion of portfolio value, the Fund may invest
up to 100% of its assets in U.S. government securities, CDs of banks having
total assets in excess of $5 billion, and repurchase agreements. Under such
circumstances, the Fund is not pursuing its investment objective but is
attempting to preserve the Fund's assets and your principal.
At least 65% of the Fund's total assets will be invested in securities rated AAA
by S&P or Aaa by Moody's, respectively, or, if unrated, deemed to be of
comparable quality by FISCO. As to the remaining 35% of the Fund's assets, the
portfolio securities will be rated at least AA by S&P or Aa by Moody's,
respectively, or, if unrated, will be deemed to be of comparable quality by
FISCO. In the event the rating of an issue is changed by the ratings service or
the security goes into default, the Fund will consider that event in its
evaluation of the overall investment merits of that security, but will not
necessarily dispose of the security immediately. Please see the Appendix to the
SAI for a discussion of the ratings.
THE CHARACTERISTICS OF THE MORTGAGE SECURITIES IN WHICH THE FUND INVESTS
A mortgage security is an interest in a pool of mortgage loans. The dominant
issuers or guarantors of mortgage securities today are GNMA, FNMA, and FHLMC.
GNMA creates mortgage securities from pools of government guaranteed or insured
(Federal Housing Authority or Veterans Administration) mortgages originated by
mortgage bankers, commercial banks, and savings and loan associations. FNMA and
FHLMC issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions, and mortgage bankers.
Most mortgage securities issued or guaranteed by GNMA, FNMA, or FHLMC are called
pass-through securities, which means that they provide investors with monthly
payments consisting of a pro rata share of both regular interest and principal
payments, as well as unscheduled early prepayments, on the underlying mortgage
pool. The Fund invests in both "modified" and "straight" pass-through
securities. For "modified pass-through" type mortgage securities, principal and
interest are guaranteed, whereas "straight pass-through" securities do not carry
such a guarantee. Collateralized mortgage obligations and stripped
mortgage-backed securities are not pass-through securities.
The principal and interest on GNMA securities are guaranteed by GNMA and backed
by the full faith and credit of the U.S. government. Mortgage securities from
FNMA and FHLMC are not backed by the full faith and credit of the U.S.
government. FNMA guarantees full and timely payment of all interest and
principal, and FHLMC guarantees timely payment of interest and the ultimate
collection of principal. Securities issued by FNMA are supported by that
instrumentality's right to borrow money from the U.S. Treasury under certain
circumstances. Securities issued by FHLMC are supported only by the credit of
that instrumentality. There is no guarantee that the government would support
government agency or instrumentality securities and, accordingly, they may
involve a risk of non-payment of principal and interest. Notwithstanding the
foregoing, because FNMA and FHLMC are instrumentalities of the U.S. government,
these securities are generally considered to be high-quality investments having
minimal credit risks.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage securities, nor do they extend to the value of
the Fund's shares. In general, the value of fixed-income securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas interest rates
of ARMS move with market interest rates, and thus their value tends to fluctuate
to a lesser degree. In view of such factors, the ability of the Fund to obtain a
high level of total return may be limited under varying market conditions.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional mortgage securities,
are interests in pools of mortgage loans and are issued or guaranteed by a
federal agency or instrumentality or by private issuers. Unlike fixed-rate
mortgages, which generally decline in value during periods of rising interest
rates, the interest rates on the mortgages underlying ARMS are reset
periodically and thus allow the Fund to participate in increases in interest
rates, resulting in both higher current yields and lower price fluctuations.
The rate of amortization of principal, as well as interest payments, for certain
types of ARMS change in accordance with movements in a pre-specified, published
interest rate index. There are several categories of indices, including those
based on U.S. Treasury securities, those derived from a calculated measure, such
as a cost of funds index, or a moving average of mortgage rates and actual
market rates. The amount of interest due to an ARM security holder is calculated
by adding a specified additional amount, the "margin," to the index, subject to
limitations or "caps" on the maximum and minimum interest that is charged to the
mortgagor during the life of the mortgage or to maximum and minimum changes to
that interest rate during a given period. The interest rates paid on the ARMS in
which the Fund may invest are generally readjusted at intervals of one year or
less, although instruments with longer resets such as three years and five years
are also permissible investments.
The underlying mortgages which collateralize the ARMS in which the Fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization, which can
extend the average life of the securities. Since most ARMS in the Fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause such
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in SMBS 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 are more liquid than privately issued SMBS.
SMBS are usually structured with two classes, each receiving different
proportions of the interest and principal distributions on a pool of mortgage
assets. Typically, one class will receive some of the interest and most of the
principal from the mortgage assets, while the other class will receive most of
the interest and the remainder of the principal. In the most extreme case, one
class will receive all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity of an IO or PO class is extremely sensitive not
only to changes in prevailing interest rates but also to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund may fail to recoup fully its initial investment in an IO
even if the securities are rated in the highest rating categories, AAA by S&P or
Aaa by Moody's, respectively. As noted above, the Fund may invest up to 35% of
its assets 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 SMBS. Accordingly, some of these securities may be
illiquid. The staff of the SEC has indicated that only government-issued IO or
PO securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board. The Board may, in the future, adopt procedures that would permit
the Fund to acquire, hold, and treat as liquid government-issued IO and PO
securities. At the present time, however, all such securities will continue to
be treated as illiquid and will, together with any other illiquid investments,
not exceed 10% of the Fund's net assets. This position may be changed in the
future, without notice to shareholders, in response to the staff's continued
reassessment of this matter, as well as to changing market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS. CMOs are fixed-income securities which are
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers,
and other issuers in the U.S. Timely payment of interest and principal (but not
the market value) of some of these pools is supported by various forms of
insurance or guarantees issued by private issuers, those who pool the mortgage
assets and, in some cases, by U.S. government agencies or instrumentalities.
Prepayments of the mortgages underlying a CMO, which usually increase when
interest rates decrease, will generally reduce the life of the mortgage pool,
thereby impacting the CMO's yield. Under such circumstances, the reinvestment of
prepayments will generally be at a rate lower than the rate applicable to the
original CMO. The Fund will invest in privately issued CMOs and CMOs issued or
guaranteed by U.S. government agencies or instrumentalities, 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.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specified
coupon rate or adjustable rate and has a stated maturity or final distribution
date. Principal prepayments on collateral underlying a CMO, however, may cause
it to be retired substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of a CMO on a
monthly, quarterly, or semiannual basis. The principal and interest on the
underlying mortgages may be allocated among several classes of a series in many
ways. In a common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the classes of a series
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
The Fund will limit its investments in any privately issued CMOs considered by
the SEC to be an investment company, in a manner consistent with the provisions
of the Investment Company Act of 1940, as amended.
OTHER INVESTMENT POLICIES OF THE FUND
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund buys U.S. government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. The
securities subject to resale are held on behalf of the Fund by a custodian bank
approved by the Board. The bank or broker-dealer must transfer to the custodian
securities with an initial market value of at least 102% of the repurchase price
to help secure the obligation to repurchase the securities at a later date. The
securities are then marked-to-market daily to maintain coverage of at least
100%. If the bank or broker-dealer does not repurchase the securities as agreed,
the Fund may experience a loss or delay in the liquidation of the securities
underlying the repurchase agreement and may also incur liquidation costs. The
Fund, however, intends to enter into repurchase agreements only with banks or
broker-dealers that are considered creditworthy by FISCO.
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 buy U.S. government securities on a
when-issued basis with the intention of holding such securities, it may sell
them 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 bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of the Fund's purchase commitments until payment is
made. To the extent the Fund engages in when-issued and delayed-delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with 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 adversely affect either
the value of the Fund's portfolio securities or 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.
Options, futures and options on futures are generally considered "derivative
securities." The Fund's investment in options, futures and options on futures
will be for portfolio hedging purposes in an effort to stabilize principal
fluctuations to achieve the Fund's investment objective and not for speculation.
Please see the SAI for further discussion of futures contracts and options on
futures contracts.
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.
MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage "dollar rolls" in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type,
coupon, and maturity) securities on a specified future date. During the period
between the sale and repurchase (the "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. The Fund could suffer a loss if
the contracting party fails to perform the future transaction in that the Fund
may not be able to buy back the mortgage-backed securities it initially sold.
The Fund intends to enter into mortgage dollar rolls only with government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System.
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.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
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
bank collateral with an initial market value of at least 102% of the 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%. This collateral shall consist of cash. The
lending of securities is a common practice in the securities industry. The Fund
may engage in security loan arrangements with the primary objective of
increasing the Fund's income either through investing cash collateral in
short-term interest-bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.
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.
TAX CONSIDERATIONS. The Fund's investment in options, futures contracts, and
other complex securities are subject to special tax rules that may affect the
amount, timing, or character of the income earned by the Fund and distributed to
you. These special tax rules are discussed in the "Additional Information About
Distributions and Taxes" section of the SAI.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the bond market as a whole.
Mortgage securities differ from conventional bonds in that principal is paid
back over the life of the mortgage security rather than at maturity. As a
result, the holder of a mortgage security (i.e., the Fund) receives monthly
scheduled payments of principal and interest, and may receive unscheduled
principal payments representing prepayments on the underlying mortgages. When
the holder reinvests the payments and any unscheduled prepayments of principal
it receives, it may receive a rate of interest that is lower than the rate on
the existing mortgage securities. For this reason, mortgage securities may be
less effective than other types of U.S. government securities as a means of
"locking in" long-term interest rates.
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, while having less risk of a decline during periods of rapidly rising
rates, may also have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments may result in some loss of the holder's
principal investment to the extent of the premium paid. On the other hand, if
mortgage securities are purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income.
Interest Rate Risk. Changes in interest rates will affect the value of the
Fund's portfolio and its share price. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of the Fund's shares. Interest rates have increased and
decreased in the past. These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations.
INVESTMENT MANAGER. FISCO manages the Fund's assets and makes its investment
decisions. It is wholly owned by Resources, a publicly owned company engaged in
the financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources. Together,
FISCO and its affiliates manage over $215 billion in assets. Please see
"Investment Management and Other Services" and "Miscellaneous Information" in
the SAI for information on securities transactions and a summary of the Fund's
Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio since 1993 is Roger Bayston, Jack Lemein, and Victoria Lee.
Roger Bayston
Portfolio Manager of FISCO
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with the Franklin Templeton Group since earning his MBA in 1991.
Jack Lemein
Portfolio Manager of FISCO
Mr. Lemein 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 Templeton Group since 1984. He is a member of several securities
industry associations.
Victoria Lee
Portfolio Manager of FISCO
Ms. Lee holds a Master's degree in Business Administration from the University
of Southern California and a Bachelor of Science degree from Cornell University.
Ms. Lee has been with the Franklin Templeton Group since earning her MBA degree
in 1993. Prior thereto, she was a mortgage analyst with Bear Stearns.
MANAGEMENT FEES. During the fiscal year ended September 30, 1997, management
fees, before any advance waiver, totaled 0.40% and operating expenses, before
any advance waiver, totaled 0.82% of the average daily net assets of the Fund.
Under an agreement by FISCO to waive its fees, the Fund paid no management fees
or operating expenses. FISCO may end this arrangement at any time upon notice to
the Board.
PORTFOLIO TRANSACTIONS. FISCO tries to obtain the best execution on all
transactions. If FISCO believes more than one broker or dealer can provide the
best execution, it may consider research and related services and the sale of
Fund shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with FISCO, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. Commonly used measures
of performance include total return, current yield and current distribution
rate. Performance figures are usually calculated using the maximum sales charge,
but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by the Fund. The current distribution rate shows the
dividends or distributions paid to shareholders by the Fund. This rate is
usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Offering Price. Unlike current
yield, the current distribution rate may include income distributions from
sources other than dividends and interest received by the Fund.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of
1997 (the "1997 Act"). This new law makes sweeping changes in the Code. Because
many of these changes are complex they are discussed in the SAI.
TAXATION OF THE FUND'S INVESTMENTS.
The Fund invests your money in the bonds and other securities that are described
in the section "How does the Fund Invest its Assets?" Special tax rules may
apply in determining the income and gains that the Fund earns on its
investments. These rules may, in turn, affect the amount of distributions that
the Fund pays to you. These special tax rules are discussed in the SAI.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally pays
no federal income tax on the income and gains that it distributes to you.
HOW DOES THE FUND EARN INCOME AND GAINS?
The Fund earns interest and other income (the Fund's "income") on its
investments. When the Fund sells a security for a price that is higher than it
paid, it has a gain. When the Fund sells a security for a price that is lower
than it paid, it has a loss. If the Fund has held the security for more than one
year, the gain or loss will be a long-term capital gain or loss. If the Fund has
held the security for one year or less, the gain or loss will be a short-term
capital gain or loss. The Fund's gains and losses are netted together, and, if
the Fund has a net gain (the Fund's "gains"), that gain will generally be
distributed to you. What is a Distribution? As a shareholder, you will receive
your share of the Fund's income and gains on its investments in bonds and other
securities. The Fund's income and short-term capital gains are paid to you as
ordinary dividends. The Fund's long-term capital gains are paid to you as
capital gain distributions. If the Fund pays you an amount in excess of its
income and gains, this excess will generally be treated as a non-taxable
distribution. These amounts, taken together, are what we call the Fund's
distributions to you. # Franklin Strategic Mortgage Portfolio What is a
Redemption? A redemption is a sale by you to the Fund of some or all of your
shares in the Fund. The price per share you receive when you redeem Fund shares
may be more or less than the price at which you purchased those shares. An
exchange of shares in the Fund for shares of another Franklin Templeton Fund is
treated as a redemption of Fund shares and then a purchase of shares of the
other fund. When you redeem or exchange your shares, you will generally have a
gain or loss, depending upon whether the basis in your shares is more or less
than your cost or other basis in the shares. Call Fund Information for a free
shareholder Tax Information Handbook if you need more information in calculating
the gain or loss on the redemption or exchange of your shares.
TAXATION OF SHAREHOLDERS.
Distributions. Distributions from the Fund, whether you receive them in cash or
in additional shares, are generally subject to income tax. The Fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions, and non-taxable distributions
you received from the Fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year. The Fund's statement for the prior year will tell you how much of your
capital gain distribution represents 28% rate gain property. The remainder of
the capital gain distribution represents 20% rate gain.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the Fund's
distributions will qualify for the corporate dividends-received deduction.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your income
tax return. If you exchange Fund shares held for 90 days or less and pay no
sales charge, or a reduced sales charge, for the new shares, all or a portion of
the sales charge you paid on the purchase of the shares you exchanged is not
included in their cost for purposes of computing gain or loss on the exchange.
If you hold your shares for six months or less, any loss you have will be
treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the Fund. All or a portion of any loss on the
redemption or exchange of your shares will be disallowed by the IRS if you
purchase other shares in the Fund within 30 days before or after your redemption
or exchange.
U.S. GOVERNMENT AND STATE OBLIGATION INTEREST. Many states grant tax-free status
to dividends paid from interest earned on direct obligations of the U.S.
Government, subject to certain restrictions. Investments in state and local
obligations may also qualify for tax-free treatment. The Fund will provide you
with information at the end of each calendar year on the amount of such
dividends that may qualify for exemption from reporting on your individual
income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions, and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, the Fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions) and redemption proceeds paid to you. The Fund is
also required to begin backup withholding on your account if the IRS instructs
the Fund to do so. The Fund reserves the right not to open your account, or,
alternatively, to redeem your shares at the current net asset value, less any
taxes withheld, if you fail to provide a correct TIN, or the proper tax
certifications, or if the IRS instructs the Fund to begin backup withholding on
your account.
WHAT IS A BACKUP WITHHOLDING?
Backup Withholding occurs when the Fund is required to withhold and pay over to
the IRS 31% of your distributions and redemption proceeds. You can avoid backup
withholding by providing the Fund with your TIN, and by completing the tax
certifications on your shareholder application that you were asked to sign when
you opened your account. However, if the IRS instructs the Fund to begin backup
withholding, it is required to do so even if you provided the Fund with your TIN
and these tax certifications, and backup withholding will remain in place until
the Fund is instructed by the IRS that it is no longer required. #
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL, OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI FOR MORE COMPLETE DISCUSSION
OF THESE RULES AND RELATED MATTERS. THE TAX TREATMENT TO YOU OF DIVIDENDS,
CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID, AND INCOME TAXES WITHHELD ARE
ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK, WHICH YOU
MAY REQUEST BY CONTACTING FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Strategic Mortgage Portfolio (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust on September 23, 1992, and
is registered with the SEC. Shares of the Fund are considered Class I shares for
redemption, exchange and other purposes. Additional series and classes of shares
may be offered in the future.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a Board
member.
As of January 2, 1998, Resources owned of record and beneficially more than 25%
of the outstanding shares of the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
o To open your account: $100*
o To add to your account: $ 25*
*We may waive these minimums for retirement plans. We also reserve the right to
refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges now, you
can avoid the delay and inconvenience of having to send an additional
application to add privileges later. It is important that we receive a signed
application since we will not be able to process any redemptions from your
account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund with your check made
payable to the Fund.
For additional investments:
Send a check made payable to the Fund. Please include your
account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is busy, call
1-650/312-2000 collect, to receive a wire control
number and wire instructions. You need a new wire control
number every time you wire money into your account.
If you do not have a currently effective wire control
number, we will return the money to the bank, and we will
not credit the purchase to your account.
2. For initial investments you must also return your signed
shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before 1:00 p.m.
Pacific time and the bank receives the wired funds and
reports the receipt of wired funds to the Fund by 3:00 p.m.
Pacific time, we will credit the purchase to your account
that day. If we receive your call after 1:00 p.m. or the
bank receives the wire after 3:00 p.m., we will credit the
purchase to your account the following business day.
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THROUGH YOUR DEALER Call your investment representative
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SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Quantity Discounts. The sales charge you pay depends on the dollar amount you
invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
--------------- PERCENTAGE
AMOUNT OF PURCHASE OFFERING NET AMOUNT OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more* None None None
*Please see "Other Payments to Securities Dealers" below for a discussion of
payments Distributors may make out of its own resources to Securities Dealers
for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds, as well as those of your spouse, children under the age of 21 and
grandchildren under the age of 21. If you are the sole owner of a company, you
may also add any company accounts, including retirement plan accounts. Companies
with one or more retirement plans may add together the total plan assets
invested in the Franklin Templeton Funds to determine the sales charge that
applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased shares of the Fund at a reduced sales charge
under the group purchase privilege before February 1, 1998, however, may
continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of shares.
Certain exceptions apply, however, to Class II shareholders of another
Franklin Templeton Fund who chose to reinvest their distributions in the
Fund before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in the
Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to exchanges.
If you immediately placed your redemption proceeds in a Franklin Bank
CD, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date the CD matures, including any
rollover.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
or the Templeton Variable Products Series Fund. You should contact your tax
advisor for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy shares of the Fund without a
front-end sales charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy shares without a front-end sales charge. Retirement plans
that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet the
requirements described under "Group Purchases" above to be able to buy shares
without a front-end sales charge. We may enter into a special arrangement with a
Securities Dealer, based on criteria established by the Fund, to add together
certain small Qualified Retirement Plan accounts for the purpose of meeting
these requirements.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases made without a
sales charge by trust companies and bank trust departments, retirement plans,
Eligible Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs may receive up to 0.25% of
the amount invested. The payment is subject to the sole discretion of
Distributors, and is paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the shares
you want to exchange
- -------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to apply
to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for shares of the Fund at Net Asset Value.
If you do so and you later decide you would like to exchange into a fund that
offers an Advisor Class, you may exchange your Fund shares for Advisor Class
shares of that fund. Certain shareholders of Class Z shares of Franklin Mutual
Series Fund Inc. may also exchange their Class Z shares for shares of the Fund
at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would like your
redemption proceeds wired to a bank account, your instructions should include:
o The name, address and telephone number of the bank where you want
the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name of
the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you are
selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may have
other requirements.
- -----------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption proceeds
wired to a bank account, other than an escrow account, you must
first sign up for the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid any delay in
processing, the instructions should include the items listed in
"By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within
the last 15 days
If you do not want the ability to redeem by phone to apply to your
account, please let us know.
- ---------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
Most Franklin Templeton Funds impose a Contingent Deferred Sales Charge on
certain investments if you sell all or a part of the investment within the
Contingency Period. While the Fund generally does not impose a Contingent
Deferred Sales Charge, it will do so if you sell shares that were exchanged into
the Fund from another Franklin Templeton Fund and those shares would have been
assessed a Contingent Deferred Sales Charge in the other fund. The charge is 1%
of the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. The time the shares are held in the Fund does not count
towards the completion of any Contingency Period.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income daily and pays them
monthly on or about the last day of the month. The daily allocation of net
investment income begins on the day after we receive your money or settlement of
a wire order trade and continues to accrue through the day we receive your
request to sell your shares or the settlement of a wire order trade.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the Fund deducts a capital gain distribution
from its Net Asset Value, please keep in mind that you will receive a portion of
the price you paid back in the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge). Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE FUND. You
may change your distribution option at any time by notifying us by mail or
phone. Please allow at least seven days before the reinvestment date for us to
process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share, plus any applicable sales charges. When you sell shares, you receive the
Net Asset Value per share.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the close of the NYSE, normally 1:00 p.m. Pacific
time. You can find the prior day's closing Net Asset Value and Offering Price of
the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How are Fund Shares Valued?" in the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless all
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner. Trusts. You
should register your account as a trust only if you have a valid written trust
document. This avoids future disputes or possible court action over who owns the
account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- -----------------------------------------------------------------------------
CORPORATION Corporate Resolution
- -----------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- ----------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- ----------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below. Once your plan
is established, any distributions paid by the Fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the Fund's code number to use TeleFACTS(R). The Fund's code number
is 157.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and FISCO are also located at this address. You may also
contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- -----------------------------------------------------------------------------
Shareholder Services 1-800/632-230 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-202 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
Useful Terms and Definitions
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Certain funds in the Franklin Templeton Funds offer
multiple classes of shares. The different classes have proportionate interests
in the same portfolio of investment securities. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans. Because the Fund's sales
charge structure is similar to those of Class I shares, shares of the Fund are
considered Class I shares for redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FISCO - Franklin Institutional Services Corporation, the Fund's investment
manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.25%.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN
STRATEGIC MORTGAGE PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
FEBRUARY 1, 1998
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
How does the Fund Invest its Assets? ...............
What are the Fund's Potential Risks? ...............
Investment Restrictions ............................
Officers and Trustees ..............................
Investment Management
and Other Services ................................
How does the Fund Buy
Securities for its Portfolio? .....................
How Do I Buy, Sell and
Exchange Shares? ..................................
How are Fund Shares Valued? ........................
Additional Information on
Distributions and Taxes ...........................
The Fund's Underwriter .............................
How does the Fund
Measure Performance? ..............................
Miscellaneous Information ..........................
Financial Statements ...............................
Useful Terms and Definitions .......................
Appendix
Description of Ratings ............................
- ------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- -----------------------------------------------------------------------------
The Franklin Strategic Mortgage Portfolio (the "Fund") is a diversified series
of the Franklin Strategic Mortgage Portfolio (the "Trust"), an open-end
management investment company. The Fund's investment objective is to obtain a
high level of total return relative to the performance of the general mortgage
securities market. The Fund seeks to achieve its objective by investing
primarily in a portfolio of mortgage securities created from pools of mortgages
that are issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
The Prospectus, dated February 1, 1998, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- -----------------------------------------------------------------------------
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
- -------------------------------------------------
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
Several of the investment companies managed by an affiliate of FISCO are major
purchasers of U.S. government securities and will seek to negotiate attractive
prices for such securities and to pass on any savings derived from such
negotiations to their shareholders in the form of higher current yields. The
Fund may also participate in and benefit from such negotiated prices. It is
recognized that in some cases this procedure could possibly have a detrimental
effect on the price or volume of the security so far as the Fund is concerned.
ILLIQUID SECURITIES. As stated in the Prospectus, the Fund's policy is not to
invest more than 10% of its net assets in illiquid securities. These securities
include, among other things, those with legal or contractual restrictions on
resale (although the Fund may invest in such securities to the extent permitted
under the federal securities laws), repurchase agreements of more than seven
days duration, over-the-counter options and the assets used to cover such
options, and other securities which are not readily marketable.
RESETS. Commonly utilized indices include the one-, three-, and five-year
constant-maturity U.S. Treasury rates, the three-month U.S. Treasury bill rate,
the six-month U.S. Treasury bill rate, rates on longer-term U.S. Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-, three-, and six-month or one-year London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant-maturity U.S. Treasury
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index, tend to lag behind changes in
market rate levels and to be somewhat less volatile.
INTEREST RATE TRANSACTIONS. To attempt to protect the value of the Fund's
portfolio from interest rate fluctuations, the Fund may enter into various
hedging transactions, such as interest rate swaps and the purchase or sale of
interest rate caps and floors. The Fund will enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio; to protect against any increase in the price of securities the
Fund anticipates purchasing at a later date; or to shorten the effective
duration of its portfolio investments. The Fund intends to use these
transactions as a hedge and not as a speculative investment. The Fund will not
sell interest rate caps or floors it does not own.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, for example, an exchange of
floating-rate payments for fixed-rate payments. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling the interest rate floor.
A specific type of interest rate swap in which the Fund may invest is a mortgage
swap. In a mortgage swap, cash flows based on a group of GNMA mortgage pools are
exchanged for cash flows based on a floating interest rate. A mortgage swap is
affected by changes in interest rates which in turn affect the prepayment rate
of the underlying mortgages upon which the mortgage swap is based.
The Fund may enter into interest rate swaps, caps, and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into interest rate swaps on a
net basis, which means the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, the net amount of the two payments.
Because these hedging transactions are entered into for good-faith hedging
purposes, FISCO and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. If a swap agreement calls for payments by the Fund, the
Fund must be prepared to make such payments when due. An amount of cash or
liquid securities having an aggregate net asset value at least equal to the net
amount of the excess, if any, of the Fund's obligations over its entitlement
with respect to each interest rate swap will be maintained in a segregated
account by the Fund's custodian bank, to avoid any potential leveraging of the
Fund. The Fund will not enter into any interest rate swap, cap, or floor
transaction unless the unsecured senior debt or the claims-paying ability of the
other party is considered creditworthy by FISCO. If the other party's
creditworthiness declines, the value of a swap agreement would be likely to
decline, potentially resulting in losses. If there is a default by the other
party, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and agents,
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with markets for other similar
instruments which are traded in the interbank market.
FUTURES TRANSACTIONS. The Fund may enter into contracts for the purchase or sale
for future delivery of securities or contracts based upon financial indices
("financial futures").
The Fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to
purchase. The Fund will not enter into any financial futures contract or related
option if, immediately thereafter, more than one-third of the Fund's net assets
would be represented by futures contracts or related options.
Financial futures contracts are commodity contracts that obligate the long or
short holder to take or make delivery of a specified quantity of a financial
instrument, such as a security, or the cash value of a securities index during a
specified future period at a specified price. A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver the securities
called for by the contract at a specified price on a specified date. A
"purchase" of a futures contract means the acquisition of a contractual
obligation to acquire the securities called for by the contract at a specified
price on a specified date. Futures contracts have been designed by exchanges
which have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC") and must be executed through a futures commission merchant
or brokerage firm that is a member of the relevant contract market.
Although financial futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to take delivery of the securities. Since all transactions in the
futures market are made, offset, or fulfilled through a clearinghouse associated
with the exchange on which the contracts are traded, the Fund will incur
brokerage fees when it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the Fund from fluctuations in the price of portfolio securities without
actually buying or selling the underlying security. To the extent required by
SEC rules, when the Fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
"initial margin") as required by the relevant contract, market, and futures
commission merchant. The futures contract will be marked-to-market daily. Should
the value of the futures contract decline relative to the Fund's position, the
Fund will be required to pay the futures commission merchant an amount equal to
such change in value.
The Fund may take advantage of opportunities in the area of options and futures
contracts, options on futures contracts, and any other derivative investments
which are not presently contemplated for use by the Fund or which are not
currently available but which may be developed, to the extent such opportunities
are both consistent with the Fund's investment objective and legally permissible
for the Fund. Prior to investing in any such investment vehicle, the Fund will
supplement its Prospectus, if appropriate.
WHAT ARE THE FUND'S POTENTIAL RISKS?
- ----------------------------------------------------
FUTURES AND OPTIONS ON FUTURES
The Fund's ability to hedge effectively all or a portion of its securities
through transactions in financial futures and related options depends on the
degree to which price movements in the underlying debt securities correlate with
price movements in the relevant portion of the Fund's portfolio. Inasmuch as
such securities will not duplicate the underlying securities, the correlation
will not be perfect. Consequently, the Fund bears the risk that the prices of
the securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation between
the securities underlying the hedging instrument and the hedged securities,
which would result in a loss on both the securities and the hedging instrument.
Accordingly, successful use by the Fund of financial futures and related options
will be subject to FISCO's ability to predict correctly movements in the
direction of the securities markets generally or of a particular segment. This
requires different skills and techniques than predicting changes in the price of
individual securities.
Positions in financial futures and related options may be closed out only on an
exchange which provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close an
option or futures position. The inability to close options or futures positions
also could have an adverse impact on the Fund's ability to hedge its securities
effectively. The Fund will enter into an option or futures position only if
there appears to be a liquid secondary market for such options or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular over-the-counter ("OTC") option at any specific time.
Consequently, the Fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale transaction with
the dealer that issued it. Similarly, when the Fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer who originally wrote it.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are imposed on the maximum number of contracts which any person may trade
on a particular trading day. An exchange may order the liquidation of positions
found to be in violation of these limits, and it may impose other sanctions or
restrictions. All of FISCO's clients are treated as a single person. The Fund
does not believe that these trading and position limits will have an adverse
impact on the Fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the investment manager may
still not result in a successful transaction.
In addition, futures contracts entail the risk that the Fund's overall
performance may be poorer than if it had not entered into any futures contract
if FISCO's judgment about the general direction of interest rates is incorrect.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the Fund will lose part or all of
the benefit of the increased value of the hedged bonds because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities from its
portfolio to meet daily variation margin requirements. Such sales may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so. The Fund believes, however, that it will benefit from the use of futures
contracts.
The Fund's sales of futures contracts and purchases of put options on futures
contracts will be solely to protect its investments against declines in value.
The Fund expects that it will normally purchase securities upon termination of
long futures contracts and long call options on future contracts, but under
unusual market conditions it may terminate any of these positions without a
corresponding purchase of securities.
INVESTMENT RESTRICTIONS
- ----------------------------------------------
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
(and a pledge of assets therefor) for temporary or emergency purposes may be
made from banks in an amount up to 20% of its total asset value. The Fund will
not purchase additional portfolio securities while borrowings in excess of 5% of
its total assets are outstanding.
2. Buy any securities on "margin" or sell any securities "short," except for
any delayed-delivery or when-issued securities as described in the Prospectus.
3. Lend any funds or other assets, except by the purchase of bonds, debentures,
notes, or other debt securities as described in its Prospectus; and except that
securities of the Fund may be loaned to qualified broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of the Fund's total assets
at the time of the most recent loan. Also, the entry into repurchase agreements
is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of its total assets in the securities of
any one issuer, but this limitation does not apply to investments in securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer.
7. Purchase from or sell to the officers and trustees of the Fund, or to any
firm of which any officer or trustee is a member, as principal, any securities,
but may deal with such persons or firms as brokers and pay a customary brokerage
commission; or retain securities of any issuer if, to the knowledge of the Fund,
one or more of its officers, trustees or the administrator own beneficially more
than one-half of 1% of the securities of such issuer, and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor. (This limitation does not apply to issuers of collateralized
mortgage obligations.)
9. Acquire, lease, or hold real estate. (Does not preclude investments in
securities collateralized by real estate or interests therein.)
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads, or any combination thereof, or interests in oil, gas, or other mineral
exploration or development program, except the Fund may enter into commodities
contracts for hedging purposes. (Futures and related options are not considered
to be within the meaning of "commodity contracts, puts, calls, straddles,
spreads, or any combination thereof" for purposes of this restriction.)
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act or other applicable state law, and except in
connection with a merger, consolidation, acquisition, or reorganization. To the
extent permitted by exemptions which may be granted under the 1940 Act, the Fund
may invest in shares of one or more money market funds managed by FISCO or its
affiliates.
13. Issue senior securities as defined in the 1940 Act, except that this
restriction will not prevent the Fund from entering into repurchase agreements
or making borrowings, mortgages, and pledges as permitted by restriction #1
above.
In addition, it is the Fund's present policy (which may be changed without the
approval of the Fund's shareholders) not to invest in warrants.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
- ----------------------------------------------
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
- ----------------------------------------------------------------------------
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (52)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 54 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 57 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68)
20833 Stevens Creek Blvd.,
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief Investment
Officer and Director, Franklin Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice President, Franklin Advisers,
Inc.; officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 37 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 34 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and FISCO. Nonaffiliated members of the Board are not currently
paid fees for attending meetings. As shown above, the nonaffiliated Board
members also serve as directors or trustees of other investment companies in the
Franklin Templeton Group of Funds. They may receive fees from these funds for
their services. The following table provides the total fees paid to
nonaffiliated Board members by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN
RECEIVED FROM TEMPLETON
THE FRANKLIN GROUP OF FUNDS
TEMPLETON GROUP ON WHICH
NAME OF FUNDS** EACH SERVES***
- -------------------------------------------------------------------------------
Frank H. Abbott, III $165,937 28
Harris J. Ashton 344,642 52
S. Joseph Fortunato 361,562 54
David Garbellano* 91,317 28
Frank W.T. LaHaye 141,433 27
*Deceased, September 27, 1997.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 59 registered investment companies, with approximately 172 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of January 2, 1998, the officers and Board members, as a group, owned of
record and beneficially approximately 113 shares, or less than 1% of the Fund's
total outstanding shares. Many of the Board members also own shares in other
funds in the Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers and the father and uncle, respectively, of Charles E.
Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
- ---------------------------------------------------------
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
FISCO. FISCO provides investment research and portfolio management services,
including the selection of securities for the Fund to buy, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed. FISCO's activities are subject to the review and supervision of the
Board to whom FISCO renders periodic reports of the Fund's investment
activities. FISCO and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
FISCO and its affiliates act as investment manager to numerous other investment
companies and accounts. FISCO may give advice and take action with respect to
any of the other funds it manages, or for its own account, that may differ from
action taken by FISCO on behalf of the Fund. Similarly, with respect to the
Fund, FISCO is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that FISCO and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. FISCO is not obligated to refrain from investing in
securities held by the Fund or other funds that it manages. Of course, any
transactions for the accounts of FISCO and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays FISCO a monthly
management fee equal to an annual rate of 40/100 of 1% for the first $250
million of its average daily net assets; plus 38/100 of 1% of its average daily
net assets in excess of $250 million up to and including $500 million; plus
36/100 of 1% of its average daily net assets in excess of $500 million. The fee
is computed at the close of business daily.
For the fiscal years ended September 30, 1995, 1996 and 1997, management fees,
before any advance waiver, totaled $22,219, $25,479, and $30,144, respectively.
Under an agreement by FISCO to waive its fees, the Fund paid no management fees
during these periods.
MANAGEMENT AGREEMENT. The management agreement is in effect until February 28,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities on 30 days' written notice to FISCO, or by FISCO on 60 days' written
notice to the Fund, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with FISCO, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, FISCO pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by FISCO.
It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended
September 30, 1997, their auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended September 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
- --------------------------------------------------------
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the
selling or buying principal or market maker without incurring charges for the
services of a broker on its behalf, unless it is determined that a better price
or execution may be obtained by using the services of a broker. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask prices. The Fund seeks to obtain prompt execution
of orders at the most favorable net price. Transactions may be directed to
dealers in return for research and statistical information, as well as for
special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services FISCO receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits FISCO to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, FISCO and its affiliates may use this research and data in
their investment advisory capacities with other clients. If the Fund's officers
are satisfied that the best execution is obtained, the sale of Fund shares, as
well as shares of other funds in the Franklin Templeton Group of Funds, may also
be considered a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to FISCO will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by FISCO are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by FISCO,
taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended September 30, 1995, 1996 and 1997, the Fund paid
no brokerage commissions.
As of September 30, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
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ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Quantity
Discounts" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares may be offered with
the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- --------------------------------------------
Under $30,000 ..........................3%
$30,000 but less than $100,000 .........2%
$100,000 but less than $400,000 ........1%
$400,000 or more .......................0%
OTHER PAYMENTS TO SECURITIES DEALERS. Either Distributors or one of its
affiliates may pay the following amounts, out of its own resources, to
Securities Dealers who initiate and are responsible for purchases by certain
retirement plans without a front-end sales charge, as discussed in the
Prospectus: 1% on sales of $500,000 to $2 million, plus 0.80% on sales over $2
million to $3 million, plus 0.50% on sales over $3 million to $50 million, plus
0.25% on sales over $50 million to $100 million, plus 0.15% on sales over $100
million. Distributors may make these payments in the form of contingent advance
payments, which may be recovered from the Securities Dealer or set off against
other payments due to the dealer if shares are sold within 12 months of the
calendar month of purchase. Other conditions may apply. All terms and conditions
may be imposed by an agreement between Distributors, or one of its affiliates,
and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Fund
shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
until you fulfill the Letter. This policy of reserving shares does not apply to
certain retirement plans. If total purchases, less redemptions, equal the amount
specified under the Letter, the reserved shares will be deposited to an account
in your name or delivered to you or as you direct. If total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount that
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the Securities Dealer through whom purchases
were made pursuant to the Letter (to reflect such further quantity discount) on
purchases made within 90 days before and on those made after filing the Letter.
The resulting difference in Offering Price will be applied to the purchase of
additional shares at the Offering Price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of the purchases had been made at a single
time. Upon remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or as you direct. If
within 20 days after written request the difference in sales charge is not paid,
the redemption of an appropriate number of reserved shares to realize the
difference will be made. In the event of a total redemption of the account
before fulfillment of the Letter, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, accrued but
unpaid income dividends and capital gain distributions will be reinvested in the
Fund at the Net Asset Value on the date of the exchange, and then the entire
share balance will be exchanged into the new fund. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
- ------------------------------------------------------
We calculate the Net Asset Value per share as of the close of the NYSE, normally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. As of the
date of this SAI, the Fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by FISCO.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value of the Fund's shares is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the close of the NYSE that will not be reflected
in the computation of the Fund's Net Asset Value. If events materially affecting
the values of these securities occur during this period, the securities will be
valued at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
- ----------------------------------------------------
DISTRIBUTIONS
Distributions of Net Investment Income. The Fund receives income generally in
the form of interest, original issue, market, and acquisition discount, and
other income derived from its investments. This income, less expenses incurred
in the operation of the Fund, constitute its net investment income from which
dividends may be paid to you. Any distributions by the Fund from such income
will be taxable to you as ordinary income, whether you take them in cash or in
additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the Fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gains realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
o "28% rate gains": gains resulting from securities the Fund sold after July
28, 1997 that it held for more than one year but not more than 18 months, and
securities the Fund sold before May 7, 1997 that it held for more than one
year. These gains will be taxable to individual investors at a maximum rate
of 28%.
o "20% rate gains": gains resulting from securities the Fund sold after July
28, 1997 that it held for more than 18 months, and under a transitional rule,
securities sold by the Fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or
higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook (call Fund Information to request a copy).
This handbook has been revised to include 1997 Act tax law changes. You should
consult your personal tax advisor to address questions concerning your personal
tax reporting.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions that are declared in
October, November, or December and paid to you in January of the following year
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. Shareholders who
have not held Fund shares for a full year may have designated and distributed to
them as ordinary income or capital gain a percentage of income that is not equal
to the actual amount of such income earned during the period of their investment
in the Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Trustees reserve the right not to maintain
the qualification of the Fund as a regulated investment company if they
determine such course of action to be beneficial to you. In such case, the Fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the Fund
must meet certain specific requirements, including the following:
o The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. Government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. Government securities, and securities of other
regulated investment companies) can exceed 5% of the Fund's total assets;
o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the "DISTRIBUTIONS" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in the Fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
Fund or in another Fund in the Franklin Templeton Group of Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or eliminated
because of your reinvestment with Franklin Templeton. The portion of the sales
charge excluded from your tax basis in the shares sold will equal the amount
that the sales charge is reduced on your reinvestment. Any portion of the sales
charge excluded from your tax basis in the shares sold will be added to the tax
basis of the shares you acquire from your reinvestment in another Franklin
Templeton Fund.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. Government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper, and repurchase agreements collateralized by U.S. Government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the Fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the Fund for the most recent calendar
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES. The Fund's investment in options and futures
contracts, including transactions involving actual or deemed short sales, are
subject to many complex and special tax rules. Over-the-counter options on debt
securities will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse,
or closing out of the option or sale of the underlying security. Certain other
options and futures contracts entered into by the Fund are generally governed by
Section 1256 of the Code. These "Section 1256" positions generally include
listed options on debt securities, options on broad-based stock indexes, options
on securities indexes, options on futures contracts, regulated futures
contracts, and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain currency gain or loss covered by Section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character, and timing of income distributed to you by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods, and conversion of short-term capital losses
into long-term capital losses. The Fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one Section 1256 position and
at least one non-Section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest, or certain debt
instruments. The Fund will generally be treated as making a constructive sale
when it:
1) enters into a short sale on the same property,
2) enters into an offsetting notional principal contract, or 3) enters into a
futures or forward contract to deliver the same or substantially similar
property. Other transactions (including certain financial instruments called
collars) will be treated as constructive sales as provided in Treasury
regulations to be published. There are also certain exceptions that apply for
transactions that are closed before the end of the 30th day after the close of
the taxable year.
Distributions paid to you by the Fund of ordinary income and short-term capital
gains arising from the Fund's investments, including investments in options and
futures contracts, will be taxable to you as ordinary income. The Fund will
monitor its transactions in such options and contracts and may make certain
other tax elections in order to mitigate the effect of the above rules.
CONVERSION TRANSACTIONS. Gains realized by the Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain, may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or
4) the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
or delayed- interest bonds may cause the Fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The Fund is required to
accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in order
to maintain its qualification as a regulated investment company and to avoid
income reporting and excise taxes at the Fund level. Bonds acquired in the
secondary market for a price less than their stated redemption price, or revised
issue price in the case of a bond having OID, are said to have been acquired
with market discount. For these bonds, the Fund may elect to accrue market
discount on a current basis, in which case the Fund will be required to
distribute any such accrued discount. If the Fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
THE FUND'S UNDERWRITER
- ------------------------------------------------------
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended September 30, 1995, 1996 and 1997, were
$2,988, $8,061 and $19,564, respectively. After allowances to dealers,
Distributors retained $202, $556 and $1,209 in net underwriting discounts and
commissions. Except as noted, Distributors received no other compensation from
the Fund for acting as underwriter.
HOW DOES THE FUND MEASURE PERFORMANCE?
- ----------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. The
Fund's average annual total return for the one year period ending September 30,
1997, and for the period from inception (February 1, 1993) to September 30,
1997, was 5.20% and 6.06%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The Fund's cumulative total return for the one year
period ending September 30, 1997, and for the period from inception (February 1,
1993) to September 30, 1997, was 5.20% and 31.52%, respectively.
YIELD
Current Yield. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share earned during a
30-day base period by the maximum Offering Price per share on the last day of
the period and annualizing the result. Expenses accrued for the period include
any fees charged to all shareholders during the base period. The Fund's yield
for the 30-day period ended September 30, 1997, was 6.95%.
This figure was obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements) c = the average
daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share during a certain period and dividing that amount by the
current maximum Offering Price. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing and short-term capital gains, and is calculated over a different
period of time. The Fund's current distribution rate for the 30-day period ended
September 30, 1997, was 6.96%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market.
Another measure of volatility or risk is standard deviation. Standard deviation
is used to measure variability of Net Asset Value or total return around an
average over a specified period of time. The idea is that greater volatility
means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
b) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
c) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
d) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY magazines - provide
performance statistics over specified time periods.
e) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
f) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
g) Savings and Loan Historical Interest Rates as published in the U.S. Savings &
Loan League Fact Book.
h) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate and mortgage bonds.
i) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
j) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
k) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg, L.P.
l) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, as well as the value of its shares that are based upon
the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- ------------------------------------------
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.8 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $215 billion in assets under
management for more than 5.8 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of January 2, 1998, the principal shareholder of the Fund, beneficial or of
record, was as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- -----------------------------------------------------------------------------
Franklin Resources, Inc. 701,383 68.5%
777Mariners Island Blvd.
SanMateo, CA 94404-1584
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
- -------------------------------------
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended September 30, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I - Certain funds in the Franklin Templeton Funds offer multiple classes
of shares. The different classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Because the Fund's sales charge
structure is similar to those of Class I shares, shares of the Fund are
considered Class I shares for redemption, exchange and other purposes.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FISCO - Franklin Institutional Services Corporation, the Fund's investment
manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge is 4.25%.
PROSPECTUS - The prospectus for the Fund dated February 1, 1998, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
- -----------------------------------
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
FORM N-1A
PART C
Other Information
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements incorporated herein by reference to the Registrant's
Annual Report to Shareholders dated September 30, 1997 as filed with the
SEC electronically on form type N-30D on December 4, 1997.
(i) Report of Independent Accountants.
(ii) Financial Highlights.
(iii) Statement of Investments - September 30, 1997.
(iv) Statement of Assets and Liabilities - September 30, 1997.
(v) Statement of Operations - for the year ended September 30, 1997.
(v) Statements of Changes in Net Assets - for the years ended September
30, 1997 and 1996.
(vi) Notes to Financial Statements.
(b) The following exhibits, are incorporated by reference as noted, except for
exhibits 8(iii), 8(iv), 11(i) and 27(i) which are attached.
(1) copies of the charter as now in effect;
(i) Certificate of Trust of Franklin Strategic Mortgage
Portfolio dated September 23, 1992
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(ii) Agreement and Declaration of Trust of Franklin Strategic
Mortgage Portfolio dated September 23, 1992
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws of Franklin Strategic Mortgage
Portfolio
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(ii) Amendment to By-Laws of Franklin Strategic Mortgage
Portfolio effective April 19, 1994
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Institutional Services Corporation dated February 1, 1993
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(ii) Amendment to Management Agreement between Registrant and
Franklin Institutional Services Corporation dated August 1,
1995
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc., dated
April 23, 1995
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(ii) Forms of Dealer agreements between Franklin/Templeton
Distributors, Inc., and Securities Dealers:
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration on
Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940
Act"), with respect to securities and similar investments of the
Registrant, including the schedule of renumeration;
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 6 to Registration on
Form N-1A
File No. 33-53414
Filing Date: January 30, 1997
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 6 to Registration on
Form N-1A
File No. 33-53414
Filing Date: January 30, 1997
(iii) Amendment dated May 7, 1997 to the Master Custody Agreement
dated February 16, 1996 between Registrant and Bank of New
York
(iv) Amendment dated October 15, 1997 to the Master Custody
Agreement dated February 16, 1996 between Registrant and Bank
of New York
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Accountants
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Letter of Understanding dated January 25, 1993.
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Copy of model retirement plan is incorporated herein by
reference to:
Registrant: Franklin High Income Trust
Filing: Post Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such plan;
Not Applicable
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not
be audited);
(i) Schedule for Computation of Performance Quotation
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-7785
Filing Date: April 25, 1995
(17) Power of Attorney;
(i) Power of Attorney dated August 15, 1995
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(ii) Certificate of Secretary Dated August 15, 1995
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1995
(27) Financial Data Schedule;
(i) Financial Data Schedule for Franklin Strategic Mortgage
Portfolio
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
NONE
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of January 2, 1998 the number of record holders of the only class of
securities of the Registrant was as follows:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
Shares of Beneficial Interest 165
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Please see the By-Laws and the Management and Distribution Agreements,
previously filed as exhibits and incorporated herein by reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said Article shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
(i) The officers and directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson is a director of General
Host Corporation. For additional information please see Part B and Schedules A
and D of Form ADV of the Fund's Investment Manager (SEC File 801-40142),
incorporated herein by reference, which sets forth the officers and directors of
the Investment Manager and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Annuity Fund
Templeton Variable Products Series Fund
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the 1940 Act are kept by the Fund or its shareholder services agent,
Franklin/Templeton Investors Services, Inc., both of whose address is 777
Mariners Island Blvd., San Mateo, CA 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of
any trustee or trustees when requested in writing to do so by the
record holders of not less than 10 per cent of the Registrant's
outstanding shares to assist its shareholders in the communicating with
other shareholders in accordance with the requirements of Section 16(c)
of the Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each person to
whom a prospectus is delivered a copy of the annual report upon request
and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 28th day
of January, 1998.
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
(Registrant)
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
RUPERT H. JOHNSON, JR.* Principal Executive Officer and
Rupert H. Johnson, Jr. Trustee
Dated: January 28, 1998
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: January 28, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: January 28, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: January 28, 1998
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: January 28, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: January 28, 1998
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: January 28, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: January 28, 1998
FRANK W.T. LAHAYE* Trustee
Frank W. T. LaHaye Dated: January 28, 1998
*By
/s/ Larry L. Greene, Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
- ------------------------------------------------------------------------------
EX-99.B1(i) Certificate of Trust of Franklin Strategic *
Mortgage Portfolio dated September 23, 1992
EX-99.B1(ii) Agreement and Declaration of Trust of Franklin *
Strategic Mortgage Portfolio dated September
23, 1992
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Amendment to By-Laws dated April 19, 1994
EX-99.B5(i) Management Agreement between Registrant and *
Franklin Institutional Services Corporation
dated February 1, 1993
EX-99.B5(ii) Amendment to Management Agreement between *
Registrant and Franklin Institutional Services
Corporation dated August 1, 1995
EX-99.B6(i) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc., dated April 23, 1995
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc., and
Securities Dealers
EX-99.B8(i) Master Custody Agreement between Registrant *
and Bank of New York dated February 16, 1996
EX-99.B8(ii) Terminal Link Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.B8(iii) Amendment dated May 7, 1997 to the Master Attached
Custody Agreement dated February 16,
1996 between Registrant and Bank
of New York
EX-99B8(iv) Amendment dated October 15, 1997 to the Attached
Master Custody Agreement dated February 16,
1996 between Registrant and Bank of
New York
EX-99.B11(i) Consent of Independent Attached
Accountants
EX-99.B13(i) Letter of Understanding dated January 25, 1993 *
EX-99.B14(i) Copy of model retirement plan *
EX-99.B16(i) Schedule for computation of performance *
quotation
EX-99.B17(i) Power of Attorney dated August 15, 1995 *
EX-99.B17(ii) Certificate of Secretary dated August 15, 1995 *
EX-27.B(i) Financial Data Schedule for Franklin Strategic Attached
Mortgage Portfolio
* Incorporated by reference
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon [2] business days prior notice from a Fund that it will
invest in any security issued by a Russian issuer ("Russian Security"), the
Custodian shall to the extent required and in accordance with the terms of the
Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract must
establish the Foreign Custodian's right to conduct regular share confirmations
on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated to
effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must establish
the Foreign Custodian's right to hold shares not held directly in the beneficial
owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow
the independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the Registrar's
responsibilities with regard to corporate actions and other distributions;
(ii) the Registrar's liabilities as established under the regulations
applicable to the Russian share registration-system and (iii) the procedures
for making a claim against and receiving compensation from the registrar in
the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Subcustodian to maintain custody of the Fund's share register
extracts or other evidence of verification obtained pursuant to paragraph (b)
above.
(d) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Foreign Custodian to comply with the rules, regulations, orders and
"no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and
delivery of Securities; and
(2) providing notice to the Fund and its Board of Directors of
events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or inaction
of any Registrar or securities depository utilized in connection with Russian
Securities except to the extent that any such action or inaction was the result
of the Custodian's negligence. With respect to any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees (collectively,
"Losses") incurred by a Fund as a result of the acts or the failure to act by
any Foreign Custodian or its subsidiary in Russia ("Subsidiary"), the Custodian
shall take appropriate action to recover such Losses from the Foreign Custodian
or Subsidiary. The Custodian's sole responsibility and liability to a Fund with
respect to any Losses shall be limited to amounts so received from the Foreign
Custodian or Subsidiary (exclusive of costs and expenses incurred by the
Custodian) except to the extent that such losses were the result of the
Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /S/STEPHEN E. GRUNSTON
---------------------------
Name: Stephen E. Grunston
Title:Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /S/DEBORAH R. GATZEK
----------------------
Name: Deborah r. Gatzek
Title: Vice President
By: /s/KAREN L. SKIDMORE
-----------------------
Name: Karen L. Skidmore
Title: Assistant Vice President
1
Amendment to Master Custody Agreement
The Bank of New York and each of the Investment Companies listed on Exhibit A,
for itself and on behalf of its specified series, hereby amend the Master
Custody Agreement dated as of February 16, 1996, by replacing Exhibit A with the
attached.
Dated as of: October 15, 1997
INVESTMENT COMPANIES
By: /S/ DEBORAH R. GATZEK
----------------------
Deborah R. Gatzek
Title: Vice President & Secretary
THE BANK OF NEW YORK
By: /S/ STEPHEN E. GRUNSTON
-------------------------
Stephen E. Grunston
Title: Vice President
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
- ------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- ------------------------------------------------------------------------------
Adjustable Rate Securities Delaware Business U.S. Government
Portfolios Trust Adjustable Rate Mortgage
Portfolio
Adjustable Rate
Securities Portfolio
Franklin Asset
Allocation Fund Delaware Business Trust
Franklin California Tax-Free Maryland Corporation
Income Fund, Inc.
Franklin California Tax-Free Massachusetts Franklin California
Trust Business Trust Insured Tax-Free
Income Fund
Franklin California
Tax-Exempt Money
Fund
Franklin California Intermediate-Term
Tax-Free Income Fund
Franklin Custodian Funds, Inc. Maryland Growth Series
Corporation Utilities Series
Dynatech Series
Income Series
U.S. Government Securiteis
Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free California Corporation
Income Fund
Franklin Gold Fund California Corporation
Franklin Government Massachusetts Business
Securities Trust Trust
Franklin High Income Trust Delaware Business AGE High Income Fund
Trust
Franklin Investors
Securities Trust Massachusetts Business Franklin Global
Government Income Fund
Trust Franklin Short-
Intermediate U.S.
Gov't Securiteis Fund
Franklin Convertible
Securities Fund
Franklin Adjustable
U.S. Government
Securities Fund
Franklin Equity Income
Fund
Franklin Adjustable
Rate Securities Fund
Franklin Managed Trust Massachusetts Business Franklin Corporate
Qualified Dividend Fund
Trust Franklin Rising
Dividends Fund
Franklin Investment
Grade Income Fund
Franklin Institutional
Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Delaware Business Trust Franklin Hawaii
Securities Trust Municipal Bond Fund
Franklin California
High Yield Municipal
Fund
Franklin Washington
Municipal Bond Fund
Franklin Tennessee
Municipal Bond Fund
Franklin Arkansas
Municipal Bond Fund
Franklin New York Delaware Business Trust
Tax-Free Income
Fund
Franklin New York Massachusetts Business Franklin New York Tax-
Tax-Free trust Trust Exempt Money Fund
Franklin New York
Intermediate-Term
Tax-Free
Income Fund
Franklin New York
Insured Tax-Free Income
Fund
Franklin Real Estate Delaware Business Trust Franklin Real Estate
Securities Trust Securities Fund
Franklin Strategic Delaware Business Trust
Mortgage Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California
Growth Fund
Franklin Strategic
Income Fund
Franklin MidCap
Growth Fund
Franklin Global
Utilities Fund
Franklin Small Cap
Growth Fund
Franklin Global
Health Care Fund
Franklin Natural
Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology
Discovery Fund
Franklin Tax-Exempt California Corporation
Money Fund
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts
Trust Insured Tax-Free Income
Fund
` Franklin Michigan
Insured Tax-Free Income
Fund
Franklin Minnesota
Insured Tax-Free
Income Fund
Franklin Insured Tax-Free
Income Fund
Franklin Ohio Insured
Tax-Free Income Fund
Franklin Puerto Rico Tax-
Free Income Fund
Franklin Arizona Tax-Free
Income Fund
Franklin Colorado Tax-
Free Income Fund
Franklin Georgia
Tax-Free Income Fund
Franklin Pennsylvania
Tax-Free Income Fund
Franklin High Yield
Tax-Free Inocme fund
Franklin Missouri
Tax-Free Income Fund
Franklin Oregon Tax-Free
Income Fund
Franklin Texas Tax-Free
Income Fund
Franklin Virginia Tax-
Free Income Fund
Franklin Alabama Tax-Free
Income Fund
Franklin Florida Tax-Free
Income Fund
Franklin Connecticut
Tax-Free Income Fund
Franklin Indiana Tax-Free
Income Fund
Franklin Louisiana
Tax-Free Income Fund
Franklin Maryland Tax-
Free Income Fund
Franklin North Carolina
Tax-Free Income Fund
Franklin New Jersey
Tax-Free Income Fund
Franklin Kentucky
Tax-Free Income Fund
Franklin Federal
Intermediate-Term
Tax-Free Income Fund
Fund
Franklin Arizona Insured
Tax-Free Income Fund
Franklin Florida Insured
Tax-Free Income Fund
Franklin Michigan Tax-
Free Income Fund
- -----------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Delaware Business Trust Franklin Templeton
Allicator Series Conservative Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund
Franklin Templeton Delaware Business Trust Franklin Templeton German
Global Trust Government Bond Fund
Franklin Templeton Global
Currency Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High
Income Currency Fund
Franklin Templeton Delaware Business Trust Templeton Pacific Growth
International Trust Fund
Templeton Foreign Smaller
Companies Fund
Franklin Templeton Delaware Business Trust Franklin Templeton Money
Money Fund Trust Fund II
Franklin Value Massachusetts Business Franklin Balance Sheet
Investors Trust Trust Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Massachusetts Business Money Market Fund
Funds Trust Growth and Income Fund
Natural Resources Securities
Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income
Securities Fund
Income Securities
Fund
U.S. Government Securiteis
Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
Franklin Valuemark Massachusetts Business Templeton Pacific Growth Fund
Funds Trust Templeton International
Equity Fund
Templeton Developing Markets
Equity Fund
Templeton Global Growth Fund
Templeton Global Asset
Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International
Smaller Companies Fund
Institutional Massachusetts Business Money Market Portfolio
Fiduciary Trust Trust Franklin U.S. Government
Securities Money Market
Portfolio
Franklin U.S. Treasury Money
Market Portfolio
Franklin Institutional
Adjustable U.S. Government
Securities Fund
Franklin Institutional
Adjustable Rate Securiteis
Fund
Franklin U.S. Government
Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Delaware Business Trust The Money Market Portfolio
Portfolios The U.S. Government Securities
Money Market Portfolio
Portfolio
- -----------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- ----------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
Franklin Floating Rate Trust Delaware Business Trust
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 6
to the Registration Statement of Franklin Strategic Mortgage Portfolio on Form
N-1A (File No. 33-53414) of our report dated November 4, 1997 on our audit of
the financial statements and financial highlights of Franklin Strategic Mortgage
Portfolio, which report is included in the Annual Report to Shareholders for the
year ended September 30, 1997, which is incorporated by reference in the
Registration Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
January 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO SEPTEMBER 30, 1997 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893226
<NAME> FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 8,602,315
<INVESTMENTS-AT-VALUE> 8,816,827
<RECEIVABLES> 111,091
<ASSETS-OTHER> 6,027
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,933,945
<PAYABLE-FOR-SECURITIES> 0
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<PAID-IN-CAPITAL-COMMON> 8,910,540
<SHARES-COMMON-STOCK> 896,996
<SHARES-COMMON-PRIOR> 702,885
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> (191,107)
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<INTEREST-INCOME> 540,924
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<NET-INVESTMENT-INCOME> 540,924
<REALIZED-GAINS-CURRENT> 1,854
<APPREC-INCREASE-CURRENT> 166,546
<NET-CHANGE-FROM-OPS> 709,324
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (539,448)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 163,167
<NUMBER-OF-SHARES-REDEEMED> (21,862)
<SHARES-REINVESTED> 52,806
<NET-CHANGE-IN-ASSETS> 2,086,720
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 30,144
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 62,099
<AVERAGE-NET-ASSETS> 7,537,318
<PER-SHARE-NAV-BEGIN> 9.740
<PER-SHARE-NII> .708
<PER-SHARE-GAIN-APPREC> .220
<PER-SHARE-DIVIDEND> (.708)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.960
<EXPENSE-RATIO> .000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
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