As filed with the Securities and Exchange Commission on January 31, 2000.
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. 8 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11 (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:(650) 312-2000
MURRAY L. SIMPSON, 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, 2000 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
FRANKLIN
STRATEGIC
MORTGAGE
PORTFOLIO
INVESTMENT STRATEGY
INCOME
FEBRUARY 1, 2000
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Goal and Strategies
4 Main Risks
6 Performance
7 Fees and Expenses
8 Management
9 Distributions and Taxes
10 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
11 Sales Charges
13 Buying Shares
15 Investor Services
18 Selling Shares
20 Account Policies
22 Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
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GOAL The fund's investment goal is high total return (a combination of high
current income and capital appreciation) relative to the performance of the
general mortgage securities market.
PRINCIPAL INVESTMENTS The fund will normally invest at least 65% of its total
assets in mortgage securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The fund focuses on mortgage pass-through
securities, which are securities representing interests in "pools" of mortgage
loans, issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA"), and the Federal
Home Loan Mortgage Corporation ("FHLMC").
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The fund normally invests in mortgage pass-through securities issued or
guaranteed by GNMA, FNMA and FHLMC.
[End callout]
Government agency or instrumentality issues have different levels of credit
support. GNMA pass-through mortgage certificates are backed by the full faith
and credit of the U.S. government; FNMA pass-through mortgage certificates are
supported by the instrumentality's right to borrow from the U.S. Treasury under
certain circumstances; and FHLMC pass-through mortgage certificates are
supported only by the credit of that instrumentality. Investors should remember
that guarantees of timely repayment of principal and interest do not apply to
the market prices and yields of the securities or to the net asset value or
performance of the fund, which will vary with changes in interest rates and
other market conditions.
At least 65% of total assets will be invested in securities rated AAA by
Standard & Poor's Ratings Group ("S&P(R)") or Aaa by Moody's Investors Service,
Inc. ("Moody's") or, if unrated, will be deemed to be of comparable quality by
the manager. The remaining 35% will be rated at least AA by S&P or Aa by
Moody's, or if unrated, will be deemed to be of comparable quality by the
manager.
The fund may invest up to 35% of total assets in higher income producing
mortgage securities including adjustable rate mortgage securities ("ARMS"),
collateralized mortgage obligations ("CMOs"), and stripped mortgage-backed
securities ("SMBS"), which may or may not be issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
The fund may buy securities on a "when-issued" or "delayed delivery" basis. This
means that the securities will be paid for and delivered to the fund at a future
date, generally in 30 to 45 days.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities trading markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse conditions
exist. Under these circumstances, the fund may be unable to pursue its
investment goal because it may not invest or may invest substantially less in
mortgage securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
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INTEREST RATE When interest rates rise, debt securities prices fall. The
opposite is also true: debt securities prices rise when interest rates fall.
Generally, interest rates rise during times of inflation or a growing economy,
and will fall during an economic slowdown or recession. In general, securities
with longer maturities are more sensitive to changes in interest rates. Loan
rates on adjustable rate securities lag behind changes in market rates. If the
fund holds these securities, its net asset value may vary to the extent the
current interest rate on these securities differs from market interest rates
during periods between the interest rate reset dates.
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Changes in interest rates affect the prices of the fund's mortgage securities.
If rates rise, the price of the fund's mortgage securities may fall and so too
may the fund's share price. If rates fall, mortgage holders may refinance their
mortgage loans at lower interest rates. This means you could lose money. [End
callout]
MORTGAGE SECURITIES Mortgage securities differ from conventional debt securities
because principal is paid back over the life of the security rather than at
maturity. The fund may receive unscheduled prepayments of principal before the
security's maturity date due to voluntary prepayments, refinancing or
foreclosure on the underlying mortgage loans. To the fund this means a loss of
anticipated interest, and a portion of its principal investment represented by
any premium the fund may have paid. Mortgage prepayments generally increase when
interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities and
extend their life. This could cause the price of the mortgage securities and the
fund's share price to fall and would make the mortgage securities more sensitive
to interest rate changes.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. While securities directly issued by the U.S.
Treasury and agencies that are backed by the full faith and credit of the U.S.
government present little credit risk, securities issued by other agencies or by
private issuers may have greater credit risks. However, with respect to mortgage
securities issued by government agencies or instrumentalities, there is no
guarantee that the government would support such securities. Consequently, such
securities may still involve a risk of non-payment of principal and interest.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's price and, thus, impact fund performance.
DERIVATIVE SECURITIES CMOs and SMBS are considered derivative investments, ones
whose values depend on (or are derived from) the value of an underlying asset.
These instruments are subject to credit risk and prepayment risk associated with
the underlying mortgage assets.
YEAR 2000 At this date, it appears that neither the operations of the fund nor
its portfolio securities were materially adversely affected by Year 2000
computer-related problems. However, it is still possible that Year 2000 problems
could emerge. If a company in which the fund is invested develops problems
related to Year 2000 which have not shown up at this date, the price of its
securities may be adversely affected, and this may have an adverse effect on the
fund's share price.
The business operations of the fund and its portfolio companies depend on a
worldwide network of computer systems that contain date fields. Prior to
remediation efforts of the last several months, many of the systems previously
used a two digit date field to represent the date and could not have
distinguished the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a leap year could
have created difficulties for some systems. Year 2000 has been one of the many
factors the manager considers in making investment decisions.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
[Insert graphic of bull and bear] PERFORMANCE
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This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 6 calendar years. The table
shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Begin callout]
BEST
QUARTER:
Q2 '95
5.26%
WORST
QUARTER:
Q1 '94
- -2.41%
[End callout]
[Insert bar graph]
-1.83% 16.56% 5.32% 8.99% 7.55% 1.49%
- ------------------------------------------------------
94 95 96 97 98 99
YEAR
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (2/1/93)
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Franklin Strategic Mortgage -2.85% 6.94% 5.70%
Portfolio 2
Salomon Brothers Mortgage-Backed
Securities Index 3 1.83% 7.93% 6.28%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The unmanaged Salomon Brothers
Mortgage-Backed Securities Index includes approximately 178 issues with an
average maturity of 24.3 years, average duration of 4.67 years, and average
quality of AAA. This total return index includes GNMA, FNMA and FHLMC issues.
One cannot invest directly in an index, nor is an index representative of the
fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
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This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) as a percentage of offering price 4.25%
Load imposed on purchases 4.25%
Maximum deferred sales charge (load) None
Exchange fee 1 $5.00
Please see "Sales Charges" on page 12 for an explanation of how and when these
sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Management fees 2 0.40%
Distribution and service (12b-1) fees None
Other expenses 0.25%
Total annual fund operating expenses 2 0.65%
1. This fee is only for market timers (see page 22).
2. For the fiscal year ended September 30, 1999, the manager had agreed in
advance to waive its management fees and to assume as its own expense certain
expenses otherwise payable by the fund. With this reduction, management fees
were 0.00% and total annual fund operating expenses were 0.00%. The manager may
end this arrangement at any time upon notice to the fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------
$489 $624 $772 $1,201
MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage over
$224 billion in assets.
The team responsible for the fund's management is:
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since 1993. He joined the Franklin
Templeton Group in 1991.
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1993. He joined the Franklin
Templeton Group in 1984.
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1989.
For the fiscal year ended September 30, 1999, management fees, before any
advance waiver, were 0.40% of the fund's average monthly net assets. Under an
agreement by the manager to waive its fees, the fund did not pay any management
fees to the manager for managing the fund's assets. The manager may end this
arrangement at any time upon notice to the fund's Board of Trustees.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
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INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund declares dividends daily from
its net investment income and pays them monthly on or about the last day of the
month. Your account may begin to receive dividends on the day after we receive
your investment and will continue to receive dividends through the day we
receive a request to sell your shares. Capital gains, if any, may be distributed
annually. The amount of these distributions will vary and there is no guarantee
the fund will pay dividends.
Please keep in mind that if you invest in the fund shortly before the fund
deducts a capital gains distribution from its net asset value, you will receive
some of your investment back in the form of a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains the fund distributes are taxable to you as long-term capital gains no
matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
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By law, the fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in
the fund.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
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This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 10.14 9.96 9.74 9.91 9.42
year
Net investment income .63 .66 .71 .72 .71
Net realized and unrealized
gains (losses) (.40) .18 .22 (.17) .49
Total from investment .23 .84 .93 .55 1.20
operations
Distributions from net
investment
income (.63) (.66) (.71) (.72) (.71)
Net asset value, end of year 9.74 10.14 9.96 9.74 9.91
Total return (%) 1 2.30 8.71 9.84 5.69 13.27
Ratios/supplemental data
Net assets, end of year ($ x 32,877 14,551 8,934 6,847 5,980
1,000)
Ratios to average net assets:
(%)
Expenses - - - - -
Expenses excluding waiver
and
payments by affiliate .65 .74 .82 1.11 1.24
Net investment income 6.32 6.56 7.18 7.26 7.42
Portfolio turnover rate (%) 2 41.72 38.15 13.59 17.64 34.20
1. Total return does not include sales charges.
2. The portfolio turnover rate excludes mortgage dollar roll transactions.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
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THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
OF THE OFFERING OF YOUR NET
WHEN YOU INVEST THIS AMOUNT PRICE INVESTMENT
- -------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 13), you can buy shares without an initial sales charge.
CONTINGENT DEFERRED SALES CHARGE (CDSC)
Most Franklin Templeton Funds impose a CDSC on certain investments sold within
12 months. While the fund generally does not impose a CDSC, 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 CDSC in the other fund. The
CDSC is 1% and is based on the current value of the shares being sold or their
net asset value when purchased, whichever is less. The time the shares are held
in the fund does not count towards the 12 month holding period.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page 17
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of fund shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and retirement
plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge as
if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE
SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. For purposes of this privilege, the fund's shares are considered
Class A shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Fund shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days. The
CDSC also may be waived for certain redemptions and distributions. If you would
like information about available sales charge waivers, call your investment
representative or call Shareholder Services at 1-800/632-2301. For information
about retirement plans, you may call Retirement Plan Services at 1-800/527-2020.
A list of available sales charge waivers also may be found in the Statement of
Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
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MINIMUM INVESTMENTS
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INITIAL ADDITIONAL
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Regular accounts $1,000 $50
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UGMA/UTMA accounts $100 $50
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Retirement accounts
(other than IRAs, IRA rollovers, Education IRAs
or Roth IRAs) no minimum no minimum
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IRAs, IRA rollovers, Education IRAs or Roth IRAs $250 $50
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Broker-dealer sponsored wrap account programs $250 $50
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Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members $100 $50
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PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR
SALE IN YOUR STATE OR JURISDICTION.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for other
purposes, the fund's shares are considered Class A shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
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OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] THROUGH investment investment
YOUR INVESTMENT representative representative
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Make your check Make your check
envelope] BY MAIL payable to Franklin payable to Franklin
Strategic Mortgage Strategic Mortgage
Portfolio. Portfolio. Include
your account number
Mail the check and on the check.
your signed
application to Fill out the deposit
Investor Services. slip from your
account statement. If
you do not have a
slip, include a note
with your name, the
fund name, and your
account number.
Mail the check and deposit slip
or note to Investor Services.
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[Insert graphic of Call to receive a Call to receive a
three lightning bolts] wire control number wire control number
BY WIRE and wire instructions. and wire instructions.
1-800/632-2301 Wire the funds and To make a same day
(or 1-650/312-2000 mail your signed wire investment,
collect) application to please call us by
Investor Services. 1:00 p.m. Pacific
Please include the time and make sure
wire control number your wire arrives by
or your new account 3:00 p.m.
number on the
application.
To make a same day
wire investment,
please call us by
1:00 p.m. Pacific
time and make sure
your wire arrives
by 3:00 p.m.
- ----------------------------------------------------------------------
[Insert graphic of two Call Shareholder Call Shareholder
arrows pointing in Services at the Services at the
opposite directions] number below, or send number below or our
BY EXCHANGE signed written automated TeleFACTS
instructions. The system, or send
TeleFACTS(R) TeleFACTS system signed written
1-800/247-1753 cannot be used to instructions.
(around-the-clock open a new account.
access) (Please see page 17
(Please see page 17 for information on
for information on exchanges.)
exchanges.)
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with headset] INVESTOR SERVICES
- -------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in shares of
the fund by transferring money from your paycheck to the fund by electronic
funds transfer. If you are interested, indicate on your application that you
would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. The
time the shares are held in the fund does not count towards the CDSC holding
period. If you exchange shares subject to a CDSC into a Class A money fund, the
time your shares are held in the money fund also will not count towards the CDSC
holding period.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into the fund without any sales charge. Advisor Class shareholders of another
Franklin Templeton Fund also may exchange into the fund without any sales
charge. Advisor Class shareholders who exchange their shares for shares of the
fund and later decide they would like to exchange into another fund that offers
Advisor Class may do so.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
22).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of certificate] SELLING SHARES
- -------------------------------------------------------------------------------
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
- ----------------------------------------------------------------------
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------------------------------------------
[Insert graphic of Contact your investment representative
hands shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] BY MAIL certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
or trust accounts may need to send additional
documents.
Specify the fund, the account number and the dollar value
or number of shares you wish to sell. Be sure to include
all necessary signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and address on the
account, or otherwise according to your written
instructions.
- ----------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000
phone] BY PHONE or less, you do not hold share certificates
and you have not changed your address by
1-800/632-2301 phone within the last 15 days, you can sell
your shares by phone.
A check will be mailed to the name(s) and address on the
account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- ----------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning proceeds sent to a bank account. See the
bolts] BY ELECTRONIC policies above for selling shares by mail or
FUNDS TRANSFER (ACH) phone.
Before requesting to have redemption proceeds sent to a
bank account, please make sure we have your bank account
information on file. If we do not have this information,
you will need to send written instructions with your
bank's name and address, a voided check or savings
account deposit slip, and a signature guarantee if the
ownership of the bank and fund accounts is different.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
- ----------------------------------------------------------------------
[Insert graphic of Obtain a current prospectus for the fund you
two arrows pointing are considering.
in opposite
directions] BY Call Shareholder Services at the number below
EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
- -------------------------------------------------------------------------------
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). The fund's NAV is calculated by dividing its
net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (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, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower its
minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days' notice.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal secu-rities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer would
be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges and its other resources.
COMMISSION (%) -
Investment under $100,000 4.00
$100,000 but under $250,000 3.25
$250,000 but under $500,000 2.25
$500,000 but under $1 million 1.85
$1 million or more None
A dealer commission of up to 0.25% may be paid on NAV purchases by certain 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.
[Insert graphic of question mark] QUESTIONS
- -------------------------------------------------------------------------------
If you have any questions about the fund or your account, you can write to us at
P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ----------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
D.C. 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-7288 157 P 02/00
FRANKLIN
STRATEGIC MORTGAGE
PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. Box 997151, Sacramento, CA 95899-9983 1-800/DIAL BEN(R)
- -------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated February 1, 2000, which we may amend from time to time,
contains the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended September 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies 2
Risks 7
Officers and Trustees 9
Management and Other Services 11
Portfolio Transactions 12
Distributions and Taxes 13
Organization, Voting Rights
and Principal Holders 14
Buying and Selling Shares 15
Pricing Shares 20
The Underwriter 20
Performance 20
Miscellaneous Information 23
Description of Ratings 23
[Begin callout]
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.
[End callout]
GOAL AND STRATEGIES
- -------------------------------------------------------------------
The fund's investment goal is high total return (a combination of high current
income and capital appreciation) relative to the performance of the general
mortgage securities market. This goal is fundamental, which means it may not be
changed without shareholder approval.
The fund tries to achieve its investment goal by investing at least 65% of its
total assets in mortgage securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities. The fund normally invests in mortgage
pass-through securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and
the Federal Home Loan Mortgage Corporation ("FHLMC").
The fund may invest up to 35% of its total assets in higher income producing
mortgage securities including adjustable rate mortgage securities ("ARMS"),
collateralized mortgage obligations ("CMOs"), and stripped mortgage-backed
securities ("SMBS"), which may or may not be issued or guaranteed by the U.S.
government, its agencies or its instrumentalities.
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
goal. The fund's investment in time deposits will not exceed 10% of its total
assets. The fund also has the authority to invest in futures contracts and
options on future contracts, although it presently does not intend to
participate in these transactions.
At least 65% of the fund's total assets will be invested in securities rated AAA
by Standard & Poor's ("S&P") or Aaa by Moody's Investors Services ("Moody's"),
respectively, or, if unrated, will be deemed to be of comparable quality by the
manager. 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 the manager. 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 Description of Bond Ratings for a discussion of
the ratings.
The following is a description of the various types of securities the fund may
buy.
MORTGAGE SECURITIES 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 adjustable rate mortgage securities ("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.
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 fund's board of trustees 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 SEC staff's continued reassessment of this matter, as well as to
changing market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS CMOs are fixed-income securities which are
collateralized by pools of mortgage loans created by commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers,
and other issuers in the U.S. Timely payment of interest and principal (but not
the market value) of some of these pools is supported by various forms of
insurance or guarantees issued by private issuers, those who pool the mortgage
assets and, in some cases, by U.S. government agencies 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 Securities and Exchange Commission ("SEC") to be an investment company in a
manner consistent with the provisions of the Investment Company Act of 1940, as
amended.
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 45 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 goal 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 Although the fund has the
authority to, it does not presently intend to enter into the following
transactions: contracts for the purchase or sale for future delivery of debt
securities ("futures contracts") and options to buy or sell futures contracts
("options on futures contracts") traded on U.S. and foreign exchanges. Options,
futures and options on futures are generally considered "derivative securities."
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 goal and legally permissible for
the fund. Prior to investing in any such investment vehicle, the fund will
supplement its Prospectus, if appropriate.
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.
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.
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.
REPURCHASE AGREEMENTS The fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 10% of the value of the fund's total assets, measured at
the time of the most recent loan. For each loan, the borrower must maintain with
the fund's custodian collateral (consisting of cash) with a value at least equal
to 102% of the current market value of the loaned securities. The fund retains
all or a portion of the interest received on investment of the cash collateral
or receives a fee from the borrower. The fund also continues to receive any
distributions paid on the loaned securities. The fund may terminate a loan at
any time and obtain the return of the securities loaned within the normal
settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the manager has knowledge that, in its opinion, a material
event affecting the loaned securities will occur or the manager otherwise
believes it necessary to vote. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower. The fund will loan its securities only to
parties who meet creditworthiness standards approved by the fund's board of
trustees, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the loan.
ILLIQUID SECURITIES 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. 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 The interest rate on certain instruments that the fund may acquire, such
as ARMS, reset periodically in accordance with movements in a pre-specified,
published interest rate index. 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, the manager 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 the manager. 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.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares 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 therefore) 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. (This limitation 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 Investment Company Act of 1940 (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 the manager 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 the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation.
RISKS
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MORTGAGE SECURITIES Mortgage securities differ from conventional bonds in that
principal is paid back over the life of the mortgage security rather than at
maturity. As a result, the holder of a mortgage security (i.e., the fund)
receives 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.
FUTURES AND OPTIONS ON FUTURES Successful use by the fund of financial futures
and related options will be subject to the manager's ability to predict
correctly movements in the direction of the securities markets generally or of a
particular segment. This requires different skills and techniques than
predicting changes in the price of individual 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.
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 the manager'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'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.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc., Franklin Templeton Distributors, Inc. and Franklin Templeton Services,
Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin
Investment Advisory Services, Inc. and 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 51 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in the Franklin Templeton
Group
of Funds.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and Franklin Templeton Services, Inc.; officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be, of
27 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems),
Digital Transmission Systems, Inc. (wireless communications) and Quarterdeck
Corporation (software firm), and General Partner, Peregrine Associates, which
was the General Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology) and Spacehab, Inc. (aerospace services); director or trustee, as
the case may be, of 47 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chairman, White River Corporation (financial
services) and Hambrecht and Quist Group (investment banking), President,
National Association of Securities Dealers, Inc. and Director, Real 3D
(software).
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; President and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be, of
51 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Senior Vice
President and General Counsel, Franklin Resources, Inc.; Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC; and Vice President,
Chief Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc.
(until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 46 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 32 of the investment companies in the Franklin
Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 30 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 27 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson.
Currently, the trust does not pay noninterested board members fees for meetings
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
THE FRANKLIN GROUP
TEMPLETON OF FUNDS
GROUP OF ON WHICH
NAME FUNDS 1 ($) EACH SERVES 2
- -----------------------------------------------------------
Frank H. Abbott, III 156,060 27
Harris J. Ashton 363,165 47
S. Joseph Fortunato 363,238 49
Frank W.T. LaHaye 156,060 27
Gordon S. Macklin 363,165 47
1. For the calendar year ended December 31, 1999.
2. 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 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members 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 Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin
Advisers, Inc. The manager is a wholly owned subsidiary of
Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 40/100 of 1% of the value of net assets up to and including
$250 million;
o 38/100 of 1% of the value of net assets over $250 million and
not over $500 million; and
o 36/100 of 1% of the value of net assets in excess of $500
million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement.
For the last three fiscal years ended September 30, the fund paid the following
management fees:
MANAGEMENT
FEES PAID 1 ($)
- -----------------------------------------------
1999 0
1998 0
1997 0
1. For the fiscal years ended September 30, 1999, 1998 and 1997, management
fees, before any advance waiver, totaled $88,415, $47,370 and $30,144,
respectively. Under an agreement by the manager to waive its fees, the fund paid
the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700
million;
o 0.10% of average daily net assets over $700 million up to $1.2
billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended September 30, the manager paid the
following administration fees:
ADMINISTRATION
FEES PAID ($)
- -----------------------------------------------
1999 0
1998 0
1997 0
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The fund
also will 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 will 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, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------
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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the manager to supplement its own research and analysis
activities and to receive the views and information of individuals and research
staffs of other securities firms. As long as it is lawful and appropriate to do
so, the manager and its affiliates may use this research and data in their
investment advisory capacities with other clients. If the fund's officers are
satisfied that the best execution is obtained, the sale of fund shares, as well
as shares of other funds in the Franklin Templeton Group of Funds, also may be
considered a factor in the selection of broker-dealers to execute the fund's
portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the fiscal years ended September 30, 1999, 1998 and 1997, the fund did
not pay any brokerage commissions.
As of September 30, 1999, the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------
Distributions are subject to approval by the board. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of interest on its investments. This income, less expenses incurred in the
operation of the fund, constitutes the fund's 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 from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
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 Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. 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 earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year.
The fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. 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 or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
Any loss incurred on the redemption or exchange of shares held for six months or
less will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares. All or a portion
of any loss that you realize upon the redemption of your fund shares will be
disallowed to the extent that you buy 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 buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report any gain or loss on the redemption of your original shares
in the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded 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.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that must be met
by the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from interest rather than dividends, generally none of its
distributions will be eligible for the corporate dividends-received deduction.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund (possibly causing the fund to sell securities to raise the cash for
necessary distributions) and/or defer the fund's ability to recognize losses. In
turn, these rules may affect the amount, timing or character of the income
distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------
The fund is a diversified series of Franklin Strategic Mortgage Portfolio, an
open-end management investment company, commonly called a mutual fund. The trust
was organized as a Delaware business trust on September 23, 1992, and is
registered with the SEC.
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 that of Class A shares, shares of the fund are considered Class A
shares for redemption, exchange and other purposes.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.
As of January 3, 2000, the principal shareholder of the fund, beneficial or of
record, was:
NAME AND ADDRESS PERCENTAGE (%)
- -------------------------------------------------------------------
Franklin Resources, Inc. 1 18.5%
555 Airport Blvd. 4th Floor
Burlingame, CA 94010
1. Franklin Resources, Inc. is a Delaware corporation.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are
officers and/or trustees of the trust, may be considered
beneficial holders of the fund shares held by Franklin Resources,
Inc. (Resources). As principal shareholders of Resources, they
may be able to control the voting of Resources' shares of the
fund.
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.
As of January 3, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of the fund. The
board members may own shares in other funds in the Franklin Templeton Group of
Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
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. We may deduct any applicable banking charges
imposed by the bank from your account.
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.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25%. The initial
sales charge may be reduced for certain large purchases, as described in the
prospectus. We offer several ways for you to combine your purchases in the
Franklin Templeton Funds to take advantage of the lower sales charges for large
purchases. The Franklin Templeton Funds include the U.S. registered mutual funds
in the Franklin Group of Funds(R) and the Templeton Group of Funds except
Franklin Templeton Variable Insurance Products Trust, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge, you
may combine the amount of your current purchase with the cost or current value,
whichever is higher, of your existing shares in the Franklin Templeton Funds.
You also may combine the shares of your spouse, children under the age of 21 or
grandchildren under the age of 21. If you are the sole owner of a company, you
also may 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 (LOI). You may buy shares at a reduced sales charge by
completing the letter of intent section of your account 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 application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
shares registered in your name until you fulfill your LOI. Your periodic
statements will include the reserved shares in the total shares you own, and
we will pay or reinvest dividend and capital gain distributions on the
reserved shares according to the distribution option you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy shares at the sales charge
applicable to the amount specified in your LOI. 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. Any
purchases you made within 90 days before you filed your LOI also may qualify for
a retroactive reduction in the sales charge. If you file your LOI with the fund
before a change in the fund's sales charge, you may complete the LOI at the
lower of the new sales charge or the sales charge in effect when the LOI was
filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy 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 generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the fund's
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Fund shares may be purchased
without an initial sales charge by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund. The
distributions generally must be reinvested in the same share class. Certain
exceptions apply, however, to Class C shareholders of another Franklin
Templeton Fund who chose to reinvest their distributions in shares of 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.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death benefit
proceeds, if the annuity contract offers as an investment option the Franklin
Templeton Variable Insurance Products Trust or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you immediately placed your redemption proceeds in a Franklin Templeton money
fund, you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date they are redeemed from the money fund.
o Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Fund shares also may be purchased without an
initial sales charge by various individuals and institutions due to anticipated
economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial planners
who have entered into an agreement with Distributors for clients participating
in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their
investment accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual Series
Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31, 1996,
or who sold his or her shares of Mutual Series Class Z within the past 365
days
o Investment companies exchanging shares or selling assets
pursuant to a merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described
under "Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy shares without an initial 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.
SALES IN TAIWAN. 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.
The fund's shares 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:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- --------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the fund's
prospectus.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin Templeton Group of Funds.
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 rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE 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 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.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan.
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. 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.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
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 U.S. Securities and Exchange
Commission (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.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. 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 or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- -------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable contingent deferred sales charge (CDSC).
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.
The fund calculates the NAV per share each business day at the close of trading
on the New York Stock Exchange (normally 1:00 p.m. Pacific time). The fund does
not calculate the NAV on days the New York Stock Exchange (NYSE) is closed for
trading, which include New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects 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 NAV
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 NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended September 30:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- ---------------------------------------------------------
1999 296,123 19,042 0
1998 103,876 6,408 0
1997 19,564 1,209 0
Except as noted, Distributors received no other compensation from the fund for
acting as underwriter.
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 quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC. 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.
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 initial 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 initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial 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 average
annual total returns for the indicated periods ended September 30, 1999, were:
SINCE INCEPTION
1 YEAR (%) 5 YEARS (%) (2/1/93) (%)
- -------------------------------------------------------------------
-2.04 6.96 5.87
The following SEC formula was used to calculate these figures:
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 initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. 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 cumulative
total returns for the indicated periods ended September 30, 1999, were:
SINCE INCEPTION
1 YEAR (%) 5 YEARS (%) (2/1/93) (%)
- -------------------------------------------------------------------
-2.04 39.99 46.28
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 applicable 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
yield for the 30-day period ended September 30, 1999, was 6.51%.
The following SEC formula was used to calculate this figure:
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 current
distribution rate for the 30-day period ended September 30, 1999, was 6.52%.
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 also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance 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
IRAs, business retirement plans, and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which it is presumed
no federal income tax applies.
The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Salomon Brothers Broad Bond Index or its component indices measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Lehman Brothers Aggregate Bond Index or its component indices measures yield,
price and total return for Treasury, agency, corporate, mortgage and Yankee
bonds.
o Lehman Brothers Municipal Bond Index or its component indices measures yield,
price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields of
20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40 bonds.
The index attempts to track the new-issue market as closely as possible, so it
changes bonds twice a month, adding all new bonds that meet certain
requirements and deleting an equivalent number according to their secondary
market trading activity. As a result, the average par call date, average
maturity date, and average coupon rate can and have changed over time. The
average maturity generally has been about 29-30 years.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, FINANCIAL
WORLD, FORBES, FORTUNE, and MONEY magazines provide performance statistics
over specified time periods.
o 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.
o 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.
o 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.
o 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.
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 also may compare the fund's performance to the
return on certificates of deposit (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 fall.
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 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 is one of the
oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $224 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 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 New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF RATINGS
- -------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect
to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to
a high degree. These issues are often in default or have other
marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
File Nos. 33-53414 &
811-7288
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference to the
previously filed document indicated below, except as noted:
(a) Articles of Incorporation
(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
(b) By-laws
(i) By-Laws
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 dated 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
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Management Agreement between Registrant and
Franklin Advisers, Inc. dated February 26,
1998
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1998
(e) Underwriting Contracts
(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
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1998
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between Registrant
and Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 5 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. 5 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
Filing: Post-Effective Amendment No. 6 to
Registration on Form N-1A
File No. 33-53414
Filing Date: January 28, 1998
(iv) Amendment dated February 27, 1998, to Exhibit
A of the Master Custody Agreement between
Registrant and Bank of New York dated
February 16, 1996
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1998
(v) Foreign Custody Manager Agreement between
Registrant and Bank of New York made as of
July 30, 1998, effective as of February 27,
1998
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1998
(vi) Amendment dated September 16, 1999, to Exhibit A of the
Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services
dated October 1, 1996 and Amendment thereto
dated April 30, 1998 between Franklin
Advisers, Inc. and Franklin Templeton
Services, Inc.
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1998
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated November
20, 1998
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-53414
Filing Date: November 30, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(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
(m) Rule 12b-1 Plan
Not Applicable
(o) Rule 18f-3 Plan
Not Applicable
(p) Power of Attorney
(i) Power of Attorney dated January 20, 2000
(ii) Certificate of Secretary dated January 27, 2000
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
FUND
None
ITEM 25. 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 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
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 27. 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
Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds)
Institutional Fiduciary Trust
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 Products Series Fund
ITEM 28. 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 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
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 27th day
of January, 2000.
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 27, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: January 27, 2000
KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: January 27, 2000
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: January 27, 2000
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: January 27, 2000
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: January 27, 2000
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: January 27, 2000
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: January 27, 2000
FRANK W.T. LAHAYE* Trustee
Frank W. T. LaHaye Dated: January 27, 2000
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: January 27, 2000
*By /s/David P. Goss
David P. Goss, Attorney-in-Fact
(pursuant to Power of Attorney filed herewith)
FRANKLIN STRATEGIC MORTGAGE PORTFOLIO
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Certificate of Trust of Franklin *
Strategic Mortgage Portfolio dated
September 23, 1992
EX-99.(a)(ii) Agreement and Declaration of Trust *
of Franklin Strategic Mortgage
Portfolio dated September 23, 1992
EX-99.(b)(i) By-Laws *
EX-99.(b)(ii) Amendment to By-Laws dated April
19, 1994
EX-99.(d)(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated February 26, 1998
EX-99.(e)(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors,
Inc., dated April 23, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors,
Inc., and Securities Dealers
EX-99.(g)(i) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, 1997 to the *
Master Custody Agreement dated
February 16, 1996 between Registrant
and Bank of New York
EX-99.(g)(iv) Amendment dated February 27, 1998, *
to Exhibit A of the Master Custody
Agreement between Registrant and Bank
of New York dated February 16, 1996
EX-99.(g)(v) Foreign Custody Manager Agreement *
between Registrant and Bank of New
York made as of July 30, 1998,
effective as of February 27, 1998
EX-99.(g)(vi) Amendment dated September 16, 1999, Attached
to Exhibit A of the Master Custody
Agreement between Registrant and Bank
of New York dated February 16, 1996
EX-99.(h)(i) Subcontract for Fund Administrative *
Services dated October 1, 1996 and
Amendment thereto dated April 30,
1998 between Franklin Advisers,
Inc. and Franklin Templeton
Services, Inc.
EX-99.(i)(i) Opinion and Consent of Counsel *
dated November 20, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(l)(i) Letter of Understanding dated *
January 25, 1993
EX-99.(p)(i) Power of Attorney dated January Attached
20, 2000
EX-99.(p)(ii) Certificate of Secretary dated Attached
January 27, 2000
* Incorporated by reference
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Adjustable Rate Securities Delaware Business U.S. Government Adjustable Rate Mortgage
Portfolios Trust Portfolio
Franklin Asset Allocation Fund Delaware Business
Trust
Franklin California Tax-Free Maryland Corporation
Income
Fund, Inc.
Franklin California Tax-Free Massachusetts Franklin California Insured Tax-Free
Trust Business Trust Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term
Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California
Corporation
Franklin Federal Money Fund California
Corporation
Franklin Federal Tax- Free California
Income Fund Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Franklin Gold Fund California
Corporation
Franklin High Income Trust Delaware Business AGE High Income Fund
Trust
Franklin Investors Securities Massachusetts Franklin Global Government Income Fund
Trust Business Trust Franklin Short-Intermediate U.S. Govt
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government
Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Franklin Rising Dividends Fund
Trust
Franklin Money Fund California
Corporation
Franklin Municipal Securities Delaware Business Franklin California High Yield Municipal
Trust Trust Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Maryland Corporation Mutual Shares Fund
Inc. Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Delaware Business
Income Fund Trust
Franklin New York Tax-Free Massachusetts Franklin New York Tax-Exempt Money Fund
Trust Business Trust Franklin New York Intermediate-Term
Tax-Free
Income Fund
Franklin New York Insured Tax-Free
Income Fund
Franklin Real Estate Delaware Business Franklin Real Estate Securities Fund
Securities Trust Trust
Franklin Strategic Mortgage Delaware Business
Portfolio Trust
Franklin Strategic Series Delaware Business Franklin California Growth Fund
Trust 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 U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Tax-Exempt Money Fund California
Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Franklin Massachusetts Insured Tax-Free
Business Trust 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 Income 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 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
Franklin Arizona Insured Tax-Free Income
Fund
Franklin Florida Insured Tax-Free Income
fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Delaware Business Franklin Templeton Conservative Target
Allocator Series Trust Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Franklin Templeton Global Currency Fund
Trust Franklin Templeton Hard Currency Fund
Franklin Templeton Delaware Business Templeton Pacific Growth Fund
International Trust Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Delaware Business Franklin Templeton Money Fund
Trust Trust
Franklin Value Investors Trust Massachusetts Franklin Balance Sheet Investment Fund
Business Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Templeton Variable Massachusetts Franklin Money Market Fund
Insurance Products Trust Business Trust Franklin Growth and Income Fund
Franklin Natural Resources
Securities Fund Franklin
Real Estate Fund Franklin
Global Communications
Securities Fund Franklin
High Income Fund Templeton
Global Income Securities
Fund Franklin Income
Securities Fund Franklin
U.S. Government Fund Zero
Coupon Fund - 2000 Zero
Coupon Fund - 2005 Zero
Coupon Fund - 2010 Franklin
Rising Dividends Securities
Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Variable Massachusetts Templeton Pacific Growth Fund
Insurance Products Trust Business Trust Templeton International Equity Fund
(cont.) Templeton Developing Markets Equity Fund
Templeton Global Growth
Fund Templeton Global Asset
Allocation Fund Franklin
Small Cap Fund Franklin
Large Cap Growth Securities
Fund Templeton
International Smaller
Companies Fund Mutual
Discovery Securities Fund
Mutual Shares Securities
Fund Franklin Global Health
Care Securities Fund
Franklin Value Securities
Fund Franklin Aggressive
Growth Securities Fund
- -----------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Money Market Portfolio
Business Trust Franklin U.S. Government Securities
Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business The Money Market Portfolio
Trust The U.S. Government Securities Money
Market Portfolio
Templeton Variable Products Franklin Growth Investments Fund
Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts
Business Trust
Franklin Universal Trust Massachusetts
Business Trust
Franklin Floating Rate Trust Delaware Business
Trust
- -----------------------------------------------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 8
to the Registration Statement of Franklin Strategic Mortgage Portfolio on Form
N-1A, File No. 33-53414, of our report dated November 1, 1999, 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, 1999, filed with the Securities and Exchange Commission
pursuant to section 30(d) of the Investment Company Act of 1940, which is
incorporated by reference in the Registration Statement. We also consent to the
reference to our firm under the captions "Financial Highlights" and "Auditor."
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
January 28,2000
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN STRATEGIC MORTGAGE
PORTFOLIO (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS,
DEBORAH R. GATZEK, KAREN L. SKIDMORE, LEIANN NUZUM, Murray L. Simpson, Barbara
J. Green and David P. Goss (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, deliver and file in
the names of the undersigned, any and all instruments that said attorneys and
agents may deem necessary or advisable to enable the Registrant to comply with
or register any security issued by the Registrant under the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and the
rules, regulations and interpretations thereunder, including but not limited to,
any registration statement, including any and all pre- and post-effective
amendments thereto, any other document to be filed with the U.S. Securities and
Exchange Commission and any and all documents required to be filed with respect
thereto with any other regulatory authority. Each of the undersigned grants to
each of said attorneys, full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes, as he could
do if personally present, thereby ratifying all that said attorneys-in-fact and
agents may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each
of which shall be deemed to be an original, and all of which shall be deemed to
be a single document.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 20th day of January, 2000.
/S/RUPERT H. JOHNSON, JR. /S/FRANK H. ABBOTT, III
Rupert H. Johnson, Jr., Frank H. Abbott, III,
Principal Executive Officer and Trustee Trustee
/S/HARRIS J. ASHTON /S/HARMON E. BURNS
Harris J. Ashton, Harmon E. Burns,
Trustee Trustee
/S/S. JOSEPH FORTUNATO /S/CHARLES B. JOHNSON
S. Joseph Fortunato, Charles B. Johnson,
Trustee Trustee
/S/FRANK W.T. LAHAYE /S/GORDON S. MACKLIN
Frank W.T. LaHaye, Gordon S. Macklin,
Trustee Trustee
/S/MARTIN L. FLANAGAN /S/KIMBERLEY H. MONASTERIO
Martin L. Flanagan, Kimberley H. Monasterio,
Principal Financial Officer Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of FRANKLIN STRATEGIC
MORTGAGE PORTFOLIO (the "Trust").
As Assistant Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at a
meeting held at 777 Mariners Island Boulevard, San Mateo, California 94404, on
January 20, 2000.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Mark H. Plafker, Karen L. Skidmore,
Leiann Nuzum, Murray L. Simpson, Barbara J. Green and David P.
Goss as attorneys-in-fact for the purpose of filing documents
with the Securities and Exchange Commission, be executed by each
Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/S/DAVID P. GOSS
Dated: JANUARY 27, 2000 David P. Goss
----------------- Assistant Secretary
