As filed with the Securities and Exchange Commission on December 27, 1996
File Nos.
811-7851
333-13601
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __2__
Post-Effective Amendment No. ____ (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ____ (X)
Franklin Templeton Fund Allocator Series
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable following
the effective date of this registration statement.
DECLARATION PURSUANT TO RULE 24F-2. The issuer has elected to register an
indefinite number or amount of its securities under this registration statement
and under the Securities Act of 1933 pursuant to Section 24f-2 under the
Investment Company Act of 1940.
The Registrant hereby amends this Registration Statement on such dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until this Registration Statement shall become effective on such
date as the Commission, acting pursuant to such Section 8(a), may determine.
Franklin Templeton Fund Allocator
Cross-Reference Sheet
FORM N-1A
PART A: Information Required in the Prospectus
N-1A LOCATION IN
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "About the Fund --- Expense
Summary"
3. Condensed Financial Not Applicable
Information
4. General Description "About the Fund --- How is the
of Registrant Trust Organized?"; "About the
Fund --- How does the Fund Invest
its Assets?"; "About the Fund ---
How do the Underlying Funds
Invest their Assets?"; "About the
Fund --- What are the Underlying
Funds' Potential Risks?" About
the Fund --- What are some of the
Other Investment Policies and
Strategies of, and Risks of an
Investment in the Underlying
Funds?"; "About the Fund --- What
are the Fund's Potential Risks?";
"Appendices"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and Other "About the Fund --- How is the
Securities Trust Organized?"; "About Your
Account --- What Distributions
Might I Receive from the Fund?";
"About the Fund ---Taxes"
"About your Account --- How do
I Buy Shares?"; "About Your
Account ---Services to Help You
Manage Your Account"
7. Purchase of Securities Cover Page --- "Prospectus &
Being Offered Application"; "About Your Account
--- How Do I Buy Shares?"; "About
Your Account --- How Do I Buy
Shares in Connection with
Retirement Plans?"; "About Your
Account --- May I Exchange Shares
for Shares of Another Fund?";
"About the Fund --- Who Manages
the Fund?"; "About Your Account
--- "Transaction Procedures and
Special Requirements"
8. Redemption or Repurchase "About Your Account --- How Do I
Sell Shares?"; "About Your
Account --- May I Exchange Shares
for Shares of Another Fund?";
"About Your Account ---
Transaction Procedures and
Special Requirements"; "About
Your Account --- Services to Help
You Manage Your Account"
9. Legal Proceedings Not Applicable
Franklin Templeton Fund Allocator
Cross-Reference Sheet
FORM N-1A
PART B: Information Required in the
Statement of Additional Information
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information "Miscellaneous Information"
and History
13 Investment Objectives "How does the Fund Invest Its
and Policies Assets?"; "Investment
Restrictions"; "Appendix"
14. Management of the "Officers and Trustees"
Registrant
15. Control Persons and "Officers and Trustees"
Principal Holders of
Securities
16. Investment Advisory "Investment Advisory, Asset
and Other Services Allocation and Other Services";
See Prospectus --- "About the
Fund --- Who Manages the Fund?";
"The Fund's Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities For Its Portfolio?"
18. Capital Stock and Other See Prospectus --- "About the
Securities Fund --- How is the Trust
Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Shares?"; "How are Fund Shares
Being Offered Valued?"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of "How does the Fund Measure
Performance Data Performance?"
23. Financial Statements Not Applicable
PROSPECTUS & APPLICATION
Franklin Templeton Fund Allocator Series
INVESTMENT STRATEGY
GROWTH & INCOME
DECEMBER 31, 1996
Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
This prospectus describes the three series of Franklin Templeton Fund Allocator
Series (the "Trust"). Each series offers two classes of shares.
Each Fund may individually or together be referred to as the "Fund(s)." This
prospectus contains information you should know before investing in the Fund.
Please keep it for future reference.
The Trust has a Statement of Additional Information ("SAI") dated December 31,
1996, as may be amended from time to time. It includes more information about
the Trust's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN or write the Trust at the
address shown.
SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. SHARES OF THE TRUST INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
Franklin
Templeton
Fund Allocator
Series
- --------------------------------------------------------------------------------
December 31, 1996
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
Table of Contents
About the Fund
Expense Summary .................... 2
How does the Fund Invest its Assets? 4
What are the Fund's Potential Risks? 9
How do the Underlying Funds Invest their Assets? 10
What are the Underlying Funds' Potential Risks? 48
Who Manages the Fund? .............. 52
How does the Fund Measure Performance? 56
How is the Trust Organized? ........ 57
Taxes .............................. 57
About Your Account
How Do I Buy Shares? ............... 60
May I Exchange Shares for Shares of Another Fund? 66
How Do I Sell Shares? .............. 69
What Distributions Might I Receive from the Fund? 72
Transaction Procedures and Special Requirements 73
Services to Help You Manage Your Account 77
Glossary
Useful Terms and Definitions ....... 79
Appendices
What are some of the Other Investment Policies
and Strategies of, and Risks of an Investment in,
the Underlying Funds? .............. 81
Description of Ratings ............. 101
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
About the Fund
Expense Summary
This table is designed to help you understand the costs of investing in each
Fund. The expenses are annualized estimates based upon anticipated fees and
expenses through the fiscal year ending July 31, 1997.
Class I
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
- --------------------------------------------------------------------------------
A. Shareholder Transaction Expenses1
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering prices)2 4.50% 4.50% 4.50%
Deferred Sales Charge3 None None None
Exchange Fee (per transaction)4 $5.00 $5.00 $5.00
B. Shareholder Transaction Expenses
(as a percentage of average net assets)
Asset Allocation Fees5 0.25% 0.25% 0.25%
Rule 12b-1 Fees6 0.25% 0.25% 0.25%
Other Expenses5 0.25% 0.25% 0.25%
Management Fees of the Underlying Funds 0.57% 0.59% 0.64%
Other Expenses of the Underlying Funds 0.26% 0.26% 0.28%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses7,5 1.58% 1.60% 1.67%
- --------------------------------------------------------------------------------
Class II
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
- --------------------------------------------------------------------------------
A. Shareholder Transaction Expenses1
Maximum Sales Charges
(as a percentage of offering prices) 1.99% 1.99% 1.99%
Paid at time of purchase8 1.00% 1.00% 1.00%
Paid at redemption3 0.99% 0.99% 0.99%
Exchange Fee (per transaction)4 $5.00 $5.00 $5.00
B. Shareholder Transaction Expenses
(as a percentage of average net assets)
Asset Allocation Fees5 0.25% 0.25% 0.25%
Rule 12b-1 Fees6 1.00% 1.00% 1.00%
Other Expenses5 0.25% 0.25% 0.25%
Management Fees of the Underlying Funds 0.57% 0.59% 0.64%
Other Expenses of the Underlying Funds 0.26% 0.26% 0.28%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses7,5 2.33% 2.35% 2.42%
- --------------------------------------------------------------------------------
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
- --------------------------------------------------------------------------------
Class I
One Year9 $60 $61 $61
Three Years $93 $93 $95
Class II
One Year $43 $43 $44
Three Years $82 $83 $85
For the same Class II investment, you would pay projected expenses of $34
(Franklin Templeton Conservative Target Fund), $33 (Franklin Templeton Moderate
Target Fund), and $34 (Franklin Templeton Growth Target Fund) if you did not
sell your shares at the end of the first year. Your projected expenses for the
remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
1If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
2There is no front-end sales charge if you invest $1 million or more in Class I
shares.
3A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown based
on the Net Asset Value or the Offering Price, the dollar amount paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
4$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
5With respect to each Fund, Advisers has agreed in advance to waive or limit the
asset allocation fee and/or make certain payments to reduce the Fund's direct
operating expenses so that each Fund's operating expenses do not exceed 0.75%
for Class I shares and 1.50% for Class II shares. Absent this agreement, each
Fund's total Fund operating expenses are expected to be as follows: Franklin
Templeton Conservative Target Fund 1.62% for Class I and 2.37% for Class II;
Franklin Templeton Moderate Target Fund 1.64% for Class I and 2.39% for Class
II; and Franklin Templeton Growth Target Fund 1.71% for Class I and 2.46% for
Class II.
6These fees may not exceed 0.25% for Class I shares and 1.00% for Class II
shares. The combination of front-end sales charges and Rule 12b-1 fees could
cause long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charges permitted under the NASD's rules.
7The Funds will indirectly bear their pro rata share of the expenses of the
Franklin Templeton Funds in which they invest.
8Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time, you may pay more for Class II shares. Please
see "How Do I Buy Shares? Deciding Which Class to Buy."
9Assumes a Contingent Deferred Sales Charge will not apply.
How does the Fund Invest its Assets?
The investment objective of each Fund is the highest level of long-term total
return that is consistent with an acceptable level of risk. Each Fund will
pursue its investment objective through active asset allocation implemented
primarily with investments in a combination of Franklin Templeton Funds. The
investment objective of each Fund is considered a "fundamental policy," which
means that it may not be changed without shareholder approval. Of course, there
is no assurance that each Fund's objective will be achieved.
The Trust consists of three separate funds. The Funds all pursue the same
investment objective, but with different levels of risk and return. Each Fund is
designed to be a long-term investment. The descriptions below compare the three
Funds' levels of risk and return relative to one another and are not intended to
imply any particular absolute level of risk or return for any Fund.
Franklin Templeton Conservative Target Fund is designed for investors seeking
the highest level of long-term total return that is consistent with a lower
level of risk. This Fund may therefore be most appropriate for investors having
a shorter time horizon associated with their investments.
Franklin Templeton Moderate Target Fund is designed for investors seeking the
highest level of long-term total return that is consistent with a moderate level
of risk. This Fund may therefore be most appropriate for investors having an
intermediate time horizon associated with their investments.
Franklin Templeton Growth Target Fund is designed for investors seeking the
highest level of long-term total return that is consistent with a higher level
of risk. This Fund may therefore be most appropriate for investors having a
longer time horizon associated with their investments.
Investors may gain the following benefits through participation in the Trust:
Convenient, efficient access to a broadly diversified portfolio of Franklin
Templeton Funds, in a single investment.
Disciplined asset allocation, implemented and continually reviewed by
professional portfolio managers.
A choice of three Funds offering a continuum of risk/return levels,
enabling the investor to select that Fund (or combination of Funds) which
most closely matches the investor's risk/return preferences.
The Funds will invest primarily in open-end investment companies (mutual funds)
that are members of the Franklin Templeton Group of Funds (individually, an
"Underlying Fund" and collectively, the "Underlying Funds"). The Underlying
Funds include funds investing in U.S. and foreign stocks, bonds, and money
market instruments. At any point in time, it can be expected that each Fund will
invest in a different combination of Underlying Funds, reflecting the different
levels of risk and return each Fund seeks. Advisers will employ various measures
in evaluating the risk level of each Fund, including volatility (i.e., the
variability of returns from one period to the next) and "downside" risk (i.e.,
the likelihood of the return in a particular period being below a specified
level).
The allocation of the assets of each Fund will be determined by Advisers.
Advisers is the investment manager to each Fund. Advisers or other affiliates of
Resources serve as the investment manager to each Underlying Fund. In
determining the asset allocation of the Funds, Advisers will first establish an
allocation according to asset classes. Advisers will then implement such
allocation through investment in an appropriate combination of Underlying Funds.
The Underlying Funds that will be considered for investment by each Fund are
listed below, grouped within broad asset classes. The asset class headings below
are provided for convenience and are approximate in nature. The investment
policies of the Underlying Funds may permit the funds to invest in securities
that are in addition to the securities described by a particular asset class
heading. For more detailed information on the investment policies of each
Underlying Fund, see "How do the Underlying Funds Invest their Assets?" in this
prospectus. The list of Underlying Funds may change from time to time upon the
recommendation of Advisers without shareholder approval.
U.S. Equity Funds
Franklin Equity Fund
Franklin Growth Series
Franklin Utilities Series
Franklin Small Cap Growth Fund
Franklin Value Fund
Franklin Real Estate Securities Fund
Mutual Shares Fund
Mutual Discovery Fund
U.S. Fixed-Income Funds
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin U.S. Government Securities Series
Franklin Investment Grade Income Fund
Franklin's AGE High Income Fund
International Equity Funds
Templeton Foreign Fund
Templeton Developing Markets Trust
Templeton Global Smaller Companies Fund
Templeton Foreign Smaller Companies Fund
Templeton Greater European Fund
Templeton Pacific Growth Fund
Templeton Latin America Fund
Franklin Templeton Japan Fund
International Fixed-Income Funds
Franklin Templeton Hard Currency Fund
Templeton Global Bond Fund
Franklin Global Government Income Fund
Franklin Templeton German Government Bond Fund
Natural Resources Funds
Franklin Gold Fund
Franklin Natural Resources Fund
Under normal circumstances, it can generally be anticipated that of the three
Funds, the Franklin Templeton Growth Target Fund will hold a higher percentage
of its assets in Underlying Funds investing primarily in equity, international,
and natural resources securities than will the Franklin Templeton Moderate
Target Fund, which in turn will hold a higher percentage in such Underlying
Funds than will the Franklin Templeton Conservative Target Fund. Likewise, it
can generally be anticipated that of the three Funds, the Franklin Templeton
Conservative Target Fund will hold a higher percentage of its assets in
Underlying Funds investing primarily in fixed-income securities than will the
Franklin Templeton Moderate Target Fund, which in turn will hold a higher
percentage in such Underlying Funds than will the Franklin Templeton Growth
Target Fund.
The percentage ranges targeted for each Fund by broad asset class are set forth
below. For purposes of these percentage ranges, Franklin Gold Fund, Franklin
Natural Resources Fund, Franklin Real Estate Securities Fund and Franklin
Utilities Series are considered "sector equity funds." The percentage ranges
applicable to each asset class for each Fund may be changed from time to time by
Advisers without the approval of shareholders.
U.S. AND INTERNATIONAL
U.S. AND FIXED INCOME FUNDS
INTERNATIONAL (INCLUDING DIRECT INVESTMENTS SECTOR
FUND EQUITY FUNDS IN CASH AND CASH EQUIVALENTS) EQUITY FUNDS
- --------------------------------------------------------------------------------
Conservative Target 20% to 50% 30% to 80% 0% to 20%
Moderate Target 30% to 70% 20% to 70% 0% to 30%
Growth Target 40% to 90% 10% to 60% 0% to 40%
Consistent with the table above, no more than 25% of a Fund's assets will be
invested in any one Underlying Fund, except a Fund may invest up to 50% of its
total assets in Franklin Short-Intermediate U.S. Government Securities Fund and
Franklin U.S. Government Securities Series.
Purchases of Shares of the Underlying Funds. In investing in Underlying Funds,
the Funds will invest only in Class Z shares of Mutual Shares and Discovery
Shares (defined under "How do the Underlying Funds Invest their Assets") and the
Advisor Class of the other Underlying Funds. Accordingly, the Funds will not pay
any sales load or 12b-1 service or distribution fees in connection with their
investments in shares of the Underlying Funds. The Funds, however, will
indirectly bear their pro rata share of the fees and expenses incurred by the
Underlying Funds that are applicable to holders of Class Z and Advisor Class
shares. The investment returns of each Fund, therefore, will be net of the
expenses of the Underlying Funds in which it is invested.
Direct Investment in Securities and Other Investment Strategies. Each Fund may
invest a certain portion of its assets directly in the types of securities in
which the Underlying Funds invest. Each Fund does not intend to invest more than
5% of its assets directly in such securities, except for securities either
issued or backed by the full faith and credit of the U.S. government and
repurchase agreements. Securities issued by the U.S. government include, but are
not limited to, U.S. Treasury bills, notes, and bonds, and securities backed by
the full faith and credit of the U.S. government include those issued by the
Government National Mortgage Association. For a description of these securities,
please see "U.S. Government Securities Series of Franklin Custodian Funds" under
"How do the Underlying Funds Invest their Assets?" and "What are some of the
Other Investment Policies and Strategies of, and Risks of an Investment in, the
Underlying Funds?" in the Appendix to this prospectus.
In addition, each Fund may engage directly in the types of investment strategies
in which each Underlying Fund may engage. Each Fund may use such investment
strategies to hedge investment positions, including investments directly in
securities and investments in the Underlying Funds, to protect the Fund against
a decline in an Underlying Fund's value. Each Fund does not intend to commit
more than 5% of its assets to these investment strategies. For a discussion of
these investment strategies, see "What are the Fund's Potential Risks?"; "Other
Investment Policies of the Underlying Funds?"; "What are the Underlying Funds'
Potential Risks?" and "What are Some of the Other Investment Policies and
Strategies of, and Risks of an Investment in, the Underlying Funds?" in the
Appendix to this prospectus.
Each Fund is also authorized to invest up to 100% of its assets temporarily in
the same types of securities in which the Underlying Funds may invest
temporarily and under the same circumstances as the Underlying Funds. See
"Temporary Investments" in the Appendix to this prospectus.
See "What are the Fund's Potential Risks?," "How do the Underlying Funds Invest
their Assets?," "What are the Underlying Funds' Potential Risks?, the Appendix,
and the SAI.
Other Investment Policies of the Funds
Illiquid Investments. Each Fund may not invest more than 15% of its net assets,
at the time of purchase, 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.
Portfolio Turnover. Each Fund anticipates its annual portfolio turnover rate
generally will not exceed 100%, but you should not consider this rate a limiting
factor in the operation of each Fund's portfolio. A Fund may purchase or sell
its securities to: (a) accommodate purchases and sales of its shares; (b) change
the percentage of its assets invested in each of the Underlying Funds in
response to market conditions; and (c) maintain or modify the allocation of its
assets among the Underlying Funds. High turnover rates with respect to the
Underlying Funds may result in higher expenses being incurred by those funds.
Percentage Restrictions. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
Other Policies and Restrictions. Each Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may be changed only with shareholder approval. For a list of these
restrictions and more information about the Funds' investment policies, please
see "Investment Restrictions" in the SAI.
What are the Fund's Potential Risks?
Generally. The value of your shares will increase as the value of the securities
owned by the Fund increases and will decrease as the value of the Fund's
investments decrease. In addition, the Funds' share prices and yields will
fluctuate in response to movements in the securities markets as a whole. The
value of an investment in the Franklin Templeton Growth Target Fund will tend to
fluctuate more than an investment in the Franklin Templeton Moderate Target or
Franklin Templeton Conservative Target Funds.
Investing in the Underlying Funds. More than 25% of the value of a Fund's assets
is invested in a combination of the Underlying Funds. As a result, each Fund's
investment performance is directly related to the investment performance of the
Underlying Funds held by it. The ability of each Fund to meet its investment
objective is directly related to the ability of the Underlying Funds to meet
their objectives as well as the allocation among those Underlying Funds by
Advisers. There can be no assurance that the investment objective of any Fund or
Underlying Fund will be achieved.
Investment Strategies of the Underlying Funds. The Underlying Funds may engage
in a variety of investment strategies which involve certain risks. As a result,
the Funds may be subject to some of the risks resulting from these strategies.
Certain of the Underlying Funds may invest all or a portion of their assets in
foreign securities; invest all or a portion of their assets in high yielding,
high risk debt securities (commonly referred to as "junk bonds"); enter into
foreign currency transactions; engage in options transactions; engage in futures
contracts and options on future contracts; purchase zero coupon bonds and
pay-in-kind bonds; purchase restricted and illiquid securities; enter into
forward roll transactions; purchase securities on a when-issued or delayed
delivery basis; enter into repurchase agreements; borrow money; loan portfolio
securities and engage in various other investment strategies. To the extent the
Funds directly purchase these types of securities or engage in these investment
strategies, they will be subject to the same risks as the Underlying Funds.
Further information on these investment strategies can be found under "How do
the Underlying Funds Invest their Assets?," "What are the Underlying Funds'
Potential Risks?," the Appendix, and the SAI.
Non-Diversified Funds. Each Fund is considered a non-diversified investment
company under the federal securities regulations which govern mutual funds
because it invests in the securities of a limited number of mutual funds. As a
result, each Fund may be subject to greater risk with respect to its individual
portfolio than a fund that is more broadly diversified among a number of
issuers. However, the Underlying Funds themselves are diversified investment
companies with the exception of Franklin Value Fund, Franklin Natural Resources
Fund, Franklin Real Estate Securities Fund, Templeton Global Bond Fund, Franklin
Templeton German Government Bond Fund and Franklin Global Government Income
Fund.
Concentration. Seven of the Underlying Funds, Franklin Utilities Series,
Franklin Natural Resources Fund, Franklin Real Estate Securities Fund, Franklin
Gold Fund, Franklin Templeton Hard Currency Fund and Templeton Global Bond Fund,
may concentrate their investments in a particular industry or sector; Franklin
Templeton German Government Bond Fund will concentrate its assets in debt
obligations issued or guaranteed by the Federal Republic of Germany, its
agencies, instrumentalities or political subdivisions; and Franklin Global
Government Income Fund may invest more than 25% of its assets in the securities
of foreign governments. See "How do the Underlying Funds Invest their Assets?"
Each Fund does not intend to invest more than 25% of its assets in any one of
these Underlying Funds. In addition, the Funds do not intend to concentrate in
any particular industry, sector or foreign government security.
How do the Underlying Funds Invest their Assets?
The following is a summary of the investment objectives and strategies of the
Underlying Funds and the types of securities in which they may invest. The
investment objectives of the Underlying Funds are fundamental policies and there
is no assurance that they will achieve their respective investment objectives.
Additional investment strategies with respect to the Underlying Funds are
described in "What are the Underlying Funds' Potential Risks?," the Appendix,
the SAI, and the prospectuses of each Underlying Fund. For a free copy of a
prospectus of any of the Underlying Funds, call 1-800/DIAL BEN or write to the
Trust at the address shown.
Equity Funds
As described below, the following Underlying Funds are funds that invest
primarily in equity securities.
U.S. Equity Funds
Franklin Equity Fund ("Equity"). The principal investment objective of Equity is
capital appreciation. The secondary objective of the fund is to provide current
income return through the receipt of dividends or interest from its investments.
In seeking to achieve its goals, at least 65% of Equity's investments will be
made in common and preferred stocks and securities convertible into common
stocks. Equity generally invests in securities of companies which, in the
investment manager's opinion, are undervalued but have strong future earnings
growth prospects. The securities which Equity may purchase are issued by U.S. or
foreign companies. In addition, Equity may invest in relatively new or
unseasoned companies, which include companies in new and emerging industries
where the opportunity for rapid growth is expected to be above-average.
Investments in securities of issuers which have less than three years'
continuous operation will be limited to 5% of Equity's total assets.
In seeking current income, Equity may also purchase a variety of debt
securities, including bonds, debentures, notes, and commercial paper of
corporate issuers. The preferred, convertible, and debt securities in which
Equity may invest may be rated investment grade (i.e., rated in one of the top
four categories by an independent rating service, such as by S&P or Moody's) or
below. Securities are given "ratings" by independent organizations which grade
the issuer based upon its financial soundness. If Equity purchases a preferred,
convertible, or debt security that is unrated, the investment manager will
determine its quality and categorize it with similar quality securities that
have been rated. A list of these ratings is shown in the Appendix to this
prospectus.
Equity will ordinarily purchase foreign securities which are traded in the
United States or purchase American Depositary Receipts ("ADRs"), which are
certificates issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that bank or a correspondent bank. Equity may
purchase the securities of foreign issuers directly in foreign markets. Equity
may also purchase the securities of issuers in developing nations, but has no
present intention of doing so.
Growth Series of Franklin Custodian Funds, Inc. ("Growth"). The principal
investment objective of Growth is capital appreciation. The secondary objective
of Growth is current income. Growth primarily invests in common stocks or
convertible securities believed to offer favorable possibilities of capital
appreciation. The fund may invest in shares of capital stock traded on any
national securities exchange, or issued by a corporation, association or similar
entity having gross assets valued at not less than $1,000,000 as shown on its
latest published annual report, or in bonds or preferred stock convertible into
shares of capital stock listed for trading on a national securities exchange.
There are no restrictions on investment of Growth's assets in foreign
securities. The fund may purchase ADRs, and does not presently intend to invest
more than 10% of its net assets in foreign securities not publicly traded in the
United States.
Utilities Series of Franklin Custodian Funds, Inc. ("Utilities"). The investment
objectives of Utilities are both capital appreciation and current income. The
assets of Utilities may be held in cash or cash equivalents, or invested in
securities of an issuer engaged in the public utilities industry. The term
"Public Utilities Industry" includes the manufacture, production, generation,
transmission, and sale of gas, water, and electricity. The term also includes
issuers engaged in the communications field including entities such as
telephone, cellular, telegraph, satellite, microwave, and other companies
providing communication facilities for the public benefit. At least 65% of the
investments made by Utilities will be in the securities of an issuer engaged in
the Public Utilities Industry. Under normal circumstances, however, the fund
expects to have substantially all of its assets invested in such securities and
will be concentrated in the Public Utilities Industry. To achieve its investment
objective, Utilities invests primarily in common stocks, including, from time to
time, non-dividend paying common stocks if, in the opinion of the investment
manager, such securities appear to offer attractive opportunities for capital
appreciation. There are no restrictions on investment of the fund's assets in
foreign securities. Utilities may purchase ADRs, and does not presently intend
to invest more than 10% of its net assets in foreign securities not publicly
traded in the United States.
Utilities may also invest in preferred stocks and bonds issued by issuers
engaged in the Public Utilities Industry. When purchasing bonds, Utilities may
invest in securities regardless of their rating (including securities in the
lowest rating categories) depending upon prevailing market and economic
conditions or in securities which are not rated. It is the fund's intent not to
purchase fixed-income debt securities rated below B by the rating services. With
respect to unrated securities, it is also the fund's intent to purchase
securities which, in the view of the investment manager, would be comparable to
securities rated B or above by a nationally recognized rating service. Utilities
will neither purchase issues that are in default nor invest in securities which
are felt by the manager to involve excessive risk.
Franklin Small Cap Growth Fund of Franklin Strategic Series ("Small Cap"). Small
Cap's investment objective is long-term capital growth. Small Cap seeks to
achieve its objective by investing primarily in equity securities of small
capitalization growth companies. In general, companies in which Small Cap will
invest have a market capitalization of less than $1 billion at the time of Small
Cap's investment. The fund attempts to keep at least a third of its assets
invested in companies with market capitalization of $550 million or less. Market
capitalization is defined as the total market value of a company's outstanding
stock. Under normal market conditions, Small Cap will invest at least 65% of its
total assets in equity securities of small capitalization growth companies.
Selection of small company equity securities for Small Cap will be based on
characteristics such as the financial strength of the company, the expertise of
management, the growth potential of the company within its industry, and the
growth potential of the industry itself. The fund may not invest more than 10%
of its net assets in securities of issuers with less than three years of
continuous operations.
Equity securities will consist of common stock, preferred stock, warrants for
the purchase of common stock (up to 5% of the fund's total assets), and debt
securities convertible into or exchangeable for common or preferred stock.
Although Small Cap's assets will be invested primarily in equity securities of
small companies, the fund may invest up to 35% of its total assets in equity
securities of larger capitalization companies which the investment manager
believes have strong growth potential, in relatively well-known, larger
companies in mature industries which the investment manager believes have the
potential for capital appreciation. Small Cap may invest up to 25% of its total
assets in foreign securities, including those of developing markets and
sponsored or unsponsored ADRs.
Small Cap may also invest up to 35% of its assets in corporate debt securities
consisting of bonds, notes, and debentures. The fund may seek capital
appreciation by investing in debt securities which the investment manager
believes have the potential for capital appreciation as a result of improvement
in the creditworthiness of the issuer. Small Cap will invest in debt securities
rated B or above by Moody's or S&P, or in securities which are unrated if, in
the investment manager's opinion, such securities are comparable to securities
rated B or above by Moody's or S&P. The fund will not invest more than 5% of its
assets in debt securities rated lower than BBB or Baa.
Franklin Value Fund of Franklin Value Investors Trust ("Value"). Value is a
non-diversified mutual fund with an investment objective of long-term total
return. The fund seeks to achieve this objective by investing at least 65% of
its assets in the securities of companies that the investment manager believes
are undervalued. The securities in which Value may invest include common and
preferred stocks, warrants, secured and unsecured bonds, and notes. While Value
currently intends to invest primarily in domestic securities, it may also invest
in foreign securities. Income is a secondary consideration of the fund, although
it is not part of Value's investment objective.
Value invests at least 65% of its assets in companies of various sizes that the
investment manager believes are selling substantially below the underlying value
of their assets or their private market value. Private market value is what a
sophisticated investor would pay for the entire company. The investment manager
may take into account a variety of factors in order to determine whether to
purchase or hold securities including: low price to earnings ratio relative to
market, industry group or earnings growth; low price relative to book value or
cash flow; valuable franchises, patents, trademarks, trade names, distribution
channels, or market share for particular products or services, tax loss
carry-forwards, or other intangibles that may not be reflected in stock prices;
ownership of understated or underutilized tangible assets such as land, timber,
or mineral; underutilized cash or investment assets; and unusually high current
income. These criteria and others, along and in combination, may identify
companies that are attractive to financial or strategic acquirers (i.e. takeover
candidates). Purchases may include companies in cyclical businesses,
turnarounds, and companies emerging from bankruptcy. Purchase decisions may also
be influenced by company and its insiders' stock buy-backs. Value may invest in
companies that have relatively small revenues, limited product lines, and a
small share of the market for their products or services.
Value may invest in convertible securities, which are, in general, debt
obligations or preferred stocks that may be converted within a specified period
of time into a certain amount of common stock of the same or a different issuer.
Value may also invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), and in
synthetic convertible securities.
With respect to foreign securities, Value may buy sponsored or unsponsored ADRs,
Global Depositary Receipts ("GDRs"), and European Depositary Receipts ("EDRs").
GDRs and EDRs are typically issued by foreign banks or trust companies and
evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. The fund may also purchase the securities of foreign issuers
directly in foreign markets, and may purchase the securities of issuers in
developing nations.
Value may invest in structured notes. Structured notes entitle their holders to
receive some portion of the principal or interest payments that would be due on
traditional debt obligations. A zero coupon bond is a simple form of structured
note. A structured note's performance or value may be linked to a change in
return, interest rate, or value at maturity of the change in an identified or
"linked" equity security, currency, interest rate index, or other financial
indicator. The holder's right to receive principal or interest payments on a
structured note may also vary in timing or amount, depending upon changes in
certain rates of interest or other external events.
Value may invest in mortgage-backed securities, including collateralized
mortgage obligations ("CMOs"), which represent direct or indirect participation
in, or are collateralized by and payable from, mortgage loans secured by real
property. In addition, the fund may buy asset-backed securities, which represent
participation in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements, and other categories of receivables. These securities
are generally issued by trusts and special purpose corporations.
The fund may invest up to 35% of its net assets at the time of purchase in lower
rated, fixed-income and convertible securities (those rated BB or lower by S&P
or Ba or lower by Moody's) and unrated securities of comparable quality, which
the investment manager believes possess intrinsic values in excess of the
current market prices of such securities. Lower rated securities in which Value
may invest include securities rated D, the lowest rating category of S&P, or
unrated securities of comparable quality. Debt obligations rated D are in
default and the payment of interest and/or repayment of principal is in arrears.
The fund may invest in zero coupon or deferred interest securities and
pay-in-kind bonds. The fund may also acquire loan participations. For a
description of the risks associated with investing in high-yielding fixed income
securities, including defaulted securities, see "What are the Underlying Funds'
Potential Risks?"
Some of the securities Value purchases are considered "restricted securities."
Restricted securities are securities with legal or contractual restrictions on
resale, including securities that are not registered under the 1933 Act.
Securities not registered under the 1933 Act may not be sold without first being
registered, unless there is an available exemption under the Act.
Franklin Real Estate Securities Fund of Franklin Real Estate Securities Trust
("Real Estate"). The investment objective of Real Estate is to maximize total
return. In connection with this objective, Real Estate will invest primarily in
securities of companies operating in the real estate industry. Under normal
circumstances, at least 65% of the fund's total assets will be invested in real
estate securities, primarily equity real estate investment trusts ("REITs").
Real Estate may also invest in equity securities issued by home builders and
developers and in debt and convertible securities issued by REITs, home
builders, and developers. Under ordinary market conditions, the fund will seek
to achieve maximum total return. The fund will seek to accomplish this objective
in the context of its policy of investing primarily in the equity securities of
companies operating in the real estate industry and will be concentrated in such
industry.
"Real estate securities" include equity, convertible, and debt securities of
companies having the following characteristics and will be subject to the
following limitations:
1. Companies qualifying as a REIT for federal income tax purposes. In order to
qualify as a REIT, a company must derive at least 75% of its gross income
from real estate sources (rents, mortgage interest, gains from the sale of
real estate assets), and at least 95% from real estate sources, plus
dividends, interest and gains from the sale of securities. Real property,
mortgage loans, cash, and certain securities must comprise 75% of a
company's assets. In order to qualify as a REIT, a company must also make
distributions to shareholders aggregating annually at least 90% of its REIT
taxable income.
2. Companies, such as home builders and developers, having at least 50% of
their assets related to, or deriving at least 50% of their revenues from,
the ownership, construction, management, or sale of residential,
commercial, or industrial real estate.
Real Estate will invest primarily in equity real estate securities of companies
listed on a securities exchange or over-the-counter markets. The fund will
invest more than 25% of its total assets in the real estate industry as
described above.
In addition to the fund's investments in real estate securities, the fund may
also invest up to 35% of its assets in debt or equity securities of issuers
engaged in businesses closely related to the real estate industry and publicly
traded on an exchange or in the over-the-counter market, including companies
whose products and services are closely related to the real estate industry,
such as manufacturers and distributors of building supplies; financial
institutions that issue or service mortgages, such as savings and loan
associations or mortgage bankers; and companies whose principal business is
unrelated to the real estate industry but who have significant real estate
holdings (at least 50% of their respective assets) believed to be undervalued
relative to the price of those companies' securities.
Real Estate may invest in convertible and debt securities. The fund will not
acquire such securities rated lower than B by Moody's or S&P or that are not
rated but are determined to be of comparable quality by the investment manager.
In addition, the fund does not intend to invest more than 10% of its entire
portfolio in debt securities rated BB or lower by S&P or Ba or lower by Moody's.
For a description of the risks associated with investing in high-yielding fixed
income securities, see "What are the Underlying Funds' Potential Risks?"
Real Estate may invest in foreign securities not publicly traded in the United
States. It is the fund's current intention to limit such investments to less
than 5% of the fund's net assets.
Mutual Shares Fund of Mutual Series ("Mutual Shares"). The principal objective
of Mutual Shares is capital appreciation, which may occasionally be short term.
The secondary objective of the fund is income. Mutual Shares pursues its
objectives primarily through investments in common stock and preferred stock as
well as debt securities and securities convertible into common stock (including
convertible preferred and convertible debt securities). There are no pre-set
limits as to the percentage of the fund's portfolio which may be invested in
equity securities, debt securities (including "junk bonds"), or cash
equivalents.
Although Mutual Shares may invest in securities of any size issuer, it will tend
to invest in securities of issuers with market capitalizations in excess of $500
million. The fund may invest in securities that are traded on U.S. or foreign
exchanges, NASDAQ national market, or in the over-the counter market. The fund
may invest in any industry sector but will not be concentrated in any one
industry. Debt securities in which Mutual Shares invests (such as corporate and
U.S. government bonds, debentures, and notes) may or may not be rated by rating
agencies such as Moody's or S&P, and, if rated, such rating may range from the
very highest to the very lowest (C for Moody's and D for S&P). Mutual Shares has
historically invested in debt instruments issued by reorganizing or
restructuring companies, or companies which recently emerged from, or are facing
the prospect of a financial restructuring.
Mutual Shares also seeks to invest in the securities of domestic and foreign
companies involved in mergers, consolidations, liquidations, and reorganizations
or those for which there exist tender or exchange offers, and may participate in
such transactions. Although there are no restrictions limiting the extent to
which the fund may invest in such transactions, the fund presently anticipates
investing more than 50% of its portfolio in such investments. Mutual Shares from
time to time may also purchase indebtedness and participations therein, both
secured and unsecured, of debtor companies in reorganization or financial
restructuring. Such indebtedness may be in the form of loans, notes, bonds or
debentures. Participations normally are made available only on a nonrecourse
basis by financial institutions, such as banks or insurance companies, or by
governmental institutions, such as the Federal Deposit Insurance Corporation, or
the Pension Benefit Guaranty Corporation or may include supranational
organizations such as World Bank.
Mutual Shares may also purchase trade and other claims against, and other
unsecured obligations of, such debtor companies, which generally represent money
due a supplier of goods or services to such company. Some corporate debt
securities, including indebtedness, purchased by the fund may have very long
maturities. The length of time remaining until maturity is one factor the
investment manager considers in purchasing a particular indebtedness.
Indebtedness which represents indebtedness of the debtor company to a bank are
not securities of the banks issuing or selling them. Mutual Shares purchases
loans from national and state chartered banks as well as foreign ones. The fund
normally invests in senior indebtedness of the debtor companies, although on
occasion subordinated indebtedness may also be acquired. Mutual Shares generally
purchases securities for investment purposes and not for the purpose of
influencing or controlling management of the issuer. However, in certain
circumstances when the investment manager perceives that the fund may benefit,
the fund may seek to influence or control management or may invest in other
entities that purchase securities for the purpose of influencing or controlling
management, such as investing in a potential takeover or leveraged buyout or
investing in other entities engaged in such activities.
Mutual Shares may also invest in distressed mortgage obligations and other debt
secured by real property. Further, the fund may purchase securities denominated
in any currency and generally expects that it will hedge against currency risks
to the extent that hedging is available.
Mutual Shares may invest in sponsored or unsponsored ADRs and EDRs or other
securities convertible into securities of foreign issuers.
Discovery Shares Fund of Mutual Series ("Discovery Shares"). The principal
objective of Discovery Shares is long-term capital appreciation. Discovery
Shares' investment policies and strategies are virtually identical to those of
Mutual Shares, except that Discovery Shares expects to invest to a greater
degree in smaller capitalized companies. Such companies are often not well
known, may often trade at a discount and may not be followed by institutions.
Further, Discovery Shares expects that up to approximately 50% of its assets may
be invested in foreign securities. See Mutual Shares Fund of Franklin Mutual
Series Fund, Inc. above for the other investment strategies of this fund.
Fixed Income Funds
As described below, the following Underlying Funds are funds that invest
primarily in fixed income securities.
U.S. Fixed Income Funds
Franklin Short-Intermediate U.S. Government Securities Fund of Franklin
Investors Securities Trust ("Short-Intermediate"). The investment objective of
Short-Intermediate is to provide investors with as high a level of current
income as is consistent with prudent investment practices and preservation of
shareholders' capital. The fund intends to invest up to 100% of its net assets
in U.S. government securities. As a fundamental policy, Short-Intermediate must
invest at least 65% of its net assets in U.S. government securities. It is the
investment policy of the fund (which may be changed upon notice to shareholders)
to maintain the average dollar weighted maturity of its portfolio in a range of
two to five years. Within this range, the fund intends to emphasize an average
weighted maturity of 31/2 years or less.
Short-Intermediate may invest in obligations either issued or guaranteed by the
U.S. government and its agencies or instrumentalities including, but not limited
to: direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds; and obligations of U.S. government agencies or instrumentalities such
as Federal Home Loan Banks, Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives (including Central Bank
for Cooperatives), Federal Land Banks, Federal Intermediate Credit Banks,
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union Administration.
Since inception, the assets of the Fund have been invested solely in direct
obligations of the U.S. Treasury and in repurchase agreements collateralized by
U.S. Treasury obligations. The level of income achieved by Short-Intermediate
may not be as high as that of other funds which invest in lower quality,
longer-term securities. The fund may invest in zero coupon bonds issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
U.S. Government Securities Series of Franklin Custodian Funds, Inc. ("Government
Securities"). The investment objective of Government Securities is income
through investment in a portfolio limited to securities which are obligations of
the U.S. government or its instrumentalities. U.S. government securities
include, but are not limited to, U.S. Treasury bonds, U.S. Treasury notes, U.S.
Treasury bills, U.S. Treasury certificates of indebtedness, and securities
issued by instrumentalities of the U.S. government. Other than investments in
short-term U.S. Treasury securities or assets held in cash pending investment,
the assets of the fund are currently invested solely in obligations ("GNMAs") of
the Government National Mortgage Association ("Association"). GNMAs are
mortgage-backed securities representing part ownership of a pool of mortgage
loans. GNMAs differ from other bonds in that principal may be paid back on an
unscheduled basis rather than returned in a lump sum at maturity. Government
Securities will purchase GNMAs for which principal and interest are guaranteed.
The fund also purchases "adjustable rate" GNMAs and other types of securities
which may be issued with the Association's guarantee.
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the United States government. The
Association may borrow U.S. Treasury funds to the extent needed to make payments
under its guarantee. Of course, this guarantee does not extend to the market
value or yield of the GNMAs or the net asset value or performance of the Fund,
which will fluctuate daily with market conditions.
Payments to holders of GNMAs, such as the fund, consist of the monthly
distributions of interest and principal less the Association's and issuers'
fees. The portion of the monthly payment which represents a return of principal
will be reinvested by Government Securities in securities which may bear
interest at a rate higher or lower than the obligations from which the principal
payment was received. When mortgages in the pool underlying a GNMA are prepaid
by borrowers or as a result of foreclosure, such principal payments are passed
through to the GNMA holders, such as the fund. Accordingly, a GNMA's life is
likely to be substantially shorter than the stated maturity of the mortgages in
the underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
Franklin Investment Grade Income Fund of Franklin Managed Trust ("Investment
Grade"). The objective of Investment Grade is to seek a maximum level of income
consistent with prudent exposure to risk. The fund seeks to achieve its
objective by investing in a diversified portfolio of debt securities, most of
which will be intermediate-term investment grade issues and dividend-paying
common and preferred stocks. At times, particularly during periods when the
yield curve is positive, the fund will endeavor to provide a higher yield than
that available from a money market mutual fund, while attempting to avoid the
potential risks to principal often associated with both non-investment grade
securities and longer-term instruments.
Investment Grade may invest in corporate debt obligations such as bonds, notes,
and debentures; obligations convertible into common stocks; obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities;
obligations denominated in either U.S. dollars or foreign currencies issued by
foreign corporations and governments (including Canadian provinces and their
instrumentalities), and supranational entities; commercial paper; and currency
deposits or equivalents.
Under normal market conditions at least 75% of the fund's portfolio will be
invested in debt securities that are rated in one of the four highest rating
categories or in unrated securities that are of comparable quality as determined
by the investment manager. Although Investment Grade may invest up to 25% of its
portfolio in securities that are not in the four highest rating categories or
determined to be of comparable quality, the fund will not invest in any debt
securities rated lower than B by Moody's or S&P or in any equity securities of
an issuer if a majority of the issuer's debt securities are rated lower than B
by Moody's or S&P. Similarly, the fund will not invest in any unrated debt
securities that the fund considers to be of lower comparable quality than
securities rated B by Moody's or S&P. Investment Grade does not intend to invest
more than 5% of its net assets in debt securities rated below Baa by Moody's or
BBB by S&P.
While the opinion of rating services is considered in selecting rated securities
for Investment Grade's portfolio, the investment manager relies primarily on its
own credit analysis, which includes a study of the existing debt issuer's
capital structure, ability to service debt and to pay dividends, and the current
trend of earnings for any company under consideration for investment by the
fund.
Under normal economic conditions, Investment Grade will invest at least 65% of
its assets in intermediate-term obligations. Intermediate-term obligations in
which the fund invests typically will have effective remaining maturities of
between two and ten years at the time of purchase. The remaining 35% may be
invested, to the extent available and permissible, in obligations with
maturities that are shorter than two years or longer than ten years at the time
of purchase.
Investment Grade may invest in collateralized obligations, which generally are
bonds issued by single purpose, stand-alone finance subsidiaries or trusts of
financial institutions, government agencies or instrumentalities, investment
bankers or other similar institutions, such as Collateralized Automobile
Receivables ("CARs") and CMOs. CARs are generally automobile loan pass-through
certificates issued by such institutions. All such collateralized obligations
will either be issued or guaranteed by a U.S. government agency or
instrumentality rated AAA by a nationally recognized statistical rating agency.
For a discussion of the risks involved in buying these types of collateralized
obligations, please see "What are some of the other investment policies and
strategies of, and risks of an investment in, the Underlying Funds?" in the
Appendix.
Using the criteria described above, the fund may invest any portion of its
assets in debt securities issued by foreign corporations and governments and
their instrumentalities, and supranational entities. The Fund may invest in
securities issued in any currency and may hold foreign currency to the extent
consistent with its objective and policies. Securities of issuers within a given
country may be denominated in the currency of that or another country, or in
multinational currency units.
Franklin's AGE High Income Fund of Franklin High Income Trust ("AGE"). AGE's
principal investment objective is to earn a high level of current income. As a
secondary objective, the fund seeks capital appreciation to the extent it is
possible and consistent with the fund's principal objective. Yield and expected
return are the primary criteria used by the fund in selecting portfolio
securities. AGE may invest in both fixed-income debt securities and instruments
(sometimes referred to as "corporate bonds") and dividend-paying common or
preferred stocks, and will seek to invest in whatever type of security is
offering the highest yield and expected total return without excessive risk at
the time of purchase. The fund may invest in both domestic and foreign
securities and instruments. AGE is also authorized to acquire loan participation
and other related direct or indirect bank debt obligations. It is the present
policy of the fund not to invest more than 5% of its total assets in companies
which have a record of less than three years' continuous operations; this policy
may be changed without the approval of shareholders.
When purchasing fixed-income debt securities, AGE may invest in investment grade
or lower grade securities depending upon prevailing market and economic
conditions. The fund may invest up to 100% of its portfolio in non-investment
grade bonds, which entail default and other risks greater than those associated
with higher rated securities. The fund will not invest in securities which are
felt by management to involve excessive risk. AGE may purchase zero coupon or
deferred interest securities and pay-in-kind bonds. Since a substantial portion
of the fund's portfolio at any particular time may consist of debt securities,
changes in the level of interest rates, among other things, will likely affect
the value of the fund's holdings and thus the value of its investment.
The ratings assigned by a rating service will be considered in connection with
the investment of the fund's assets, but will not be a determining or limiting
factor. AGE may invest in securities regardless of their rating or in securities
which are not rated. It is the fund's intent, however, not to purchase
securities rated below CCC. With respect to unrated securities, it is the fund's
intent not to purchase securities which, in the view of the investment manager,
would be comparable to securities rated below B by Moody's or S&P. In the event
the rating on an issue held in AGE's portfolio is changed by the rating services
or the security goes into default, such event will be considered by the fund in
its evaluation of the overall investment merits of that security but will not
generally result in an automatic sale of the security. For a description of
these ratings, see the Appendix.
AGE may purchase defaulted debt securities if, in the opinion of the investment
manager, it appears likely that the issuer may resume interest payments or other
advantageous developments appear likely in the near term. The fund will not
invest more than 10% of its total assets (at the time of purchase) in defaulted
debt securities; this policy may be changed without shareholder approval. For a
description of the risks associated with investing in high yielding, fixed
income securities, including defaulted securities, see "What are the Underlying
Funds' Potential Risks?"
AGE may purchase foreign securities which are traded in the United States or
purchase ADRs. The fund may also purchase the securities of foreign issuers
directly in foreign markets and may purchase securities of U.S. issuers which
are denominated in foreign currency. Investments may be in securities of foreign
issuers, whether located in developed or undeveloped countries. The fund
presently has no intention of investing more than 10% of its net assets in
foreign securities not publicly traded in the United States.
International Funds
As described below, the following Underlying Funds are funds that primarily
invest in equity and debt securities of non-U.S. companies and governments.
International Equity Funds
Templeton Foreign Fund of Templeton Funds, Inc. ("Templeton Foreign"). The
investment objective of Templeton Foreign is long-term capital growth, which it
seeks to achieve through a flexible policy of investing in stocks and debt
obligations of companies and governments outside the United States. Any income
realized will be incidental.
Although the fund generally invests in common stock, it may also invest in
preferred stocks and certain debt securities (which may include structured
investments), rated or unrated, such as convertible bonds and bonds selling at a
discount. The fund may also purchase from banks or broker-dealers Canadian or
U.S. government securities with a simultaneous agreement by the seller to
repurchase them within no more than seven days at the original purchase price
plus accrued interest.
Templeton Foreign may purchase sponsored or unsponsored ADRs, EDRs, and GDRs.
The fund may invest no more than 5% of its total assets in securities issued by
any one company or government, exclusive of U.S. government securities. Although
the fund may invest up to 25% of its assets in a single industry, it has no
present intention of doing so. Templeton Foreign may not invest more than 5% of
its assets in warrants (exclusive of warrants acquired in units or attached to
securities) nor more than 10% of its assets in securities with a limited trading
market.
The fund is authorized to invest in medium quality or high-risk, lower quality
debt securities (which may include structured investments) that are rated
between BBB and as low as CCC by S&P and between Baa and as low as Caa by
Moody's or, if unrated, are of equivalent investment quality as determined by
the investment manager. As an initial policy, which may be changed by the Board
of Directors without shareholder approval, the fund will not invest more than 5%
of its total assets in debt securities rated lower than BBB by S&P or Baa by
Moody's. Templeton Foreign may, from time to time, purchase defaulted debt
securities if, in the opinion of the investment manager, the issuer may resume
interest payments in the near future. The fund will not invest more than 10% of
its total assets in defaulted debt securities, which may be illiquid.
Templeton Developing Markets Trust ("Developing Markets"). The investment
objective of Developing Markets is long-term capital appreciation. The fund
seeks to achieve this objective by investing primarily in equity securities of
issuers in countries having developing economic markets. It is currently
expected that under normal conditions, at least 65% of the fund's total assets
will be invested in developing market equity securities.
Developing Markets considers developing markets to be countries that are
generally considered to be developing or emerging countries by the International
Bank for Reconstruction and Development (more commonly referred to as the World
Bank) or the International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their authorities as
developing. Currently, the countries not in this category include Ireland,
Spain, New Zealand, Australia, the United Kingdom, Italy, the Netherlands,
Belgium, Austria, France, Canada, Germany, Denmark, the United States, Sweden,
Finland, Norway, Japan, Iceland, Luxembourg, and Switzerland. In addition,
developing market equity securities means (i) equity securities of companies the
principal securities trading market for which is a developing market country, as
defined above, (ii) equity securities, traded in any market, of companies that
derive 50% or more of their total revenue from either goods or services produced
in developing market countries or sales made in developing market countries or
(iii) equity securities of companies organized under the laws of, and with a
principal office in, a developing market country. "Equity securities" refers to
common stock, preferred stock, warrants, or rights to subscribe to or purchase
such securities and sponsored or unsponsored ADRs, EDRs, and GDRs. The fund will
at all times, except during defensive periods, maintain investments in at least
three countries having developing markets.
For capital appreciation, Developing Markets may invest up to 35% of its total
assets in debt securities (defined as bonds, notes, debentures, commercial
paper, certificates of deposit, time deposits, and bankers' acceptances and
which may include structured investments) which are rated at least C by Moody's
or C by S&P, or unrated debt securities deemed to be of comparable quality. As
an operating policy, which may be changed by the Board of Trustees, the fund
will not invest more than 5% of its total assets in debt securities rated lower
than Baa by Moody's or BBB by S&P. As a matter of fundamental policy, the fund
will not invest more than 10% of its total assets in defaulted debt securities,
which may be illiquid. For a description of the risks associated with investing
in high yielding, fixed income securities, including defaulted securities, see
"What are the Underlying Funds' Potential Risks?"
Templeton Global Smaller Companies Fund, Inc. ("Smaller Companies"). The
investment objective of Smaller Companies is long-term capital growth, primarily
through investment in common stocks and all types of common stock equivalents,
including rights, warrants, and preferred stock, of companies of various nations
throughout the world. The fund seeks to achieve its objective by investing
primarily in securities of smaller companies globally. Under normal
circumstances, Smaller Companies will invest at least 65% of its total assets in
issuers domiciled in at least three different nations (one of which may be the
United States).
Consistent with its investment objective, the fund expects to invest 75% of its
portfolio in issuers whose individual market capitalizations would place them
(at the time of purchase) in the same size range as companies in approximately
the lowest 20% by total market capitalization of companies that have equity
securities listed on a U.S. national securities exchange or traded in the NASDAQ
system. Based on recent U.S. share prices, these companies typically have
individual market capitalizations of between approximately $50 million and $1
billion. Because the fund is permitted to apply the U.S. size standard on a
global basis, it may invest in issuers that might rank above the lowest 20% by
total market capitalization in local markets and, in fact, might in some
countries rank among the largest companies in terms of capitalization. The Board
of Directors has adopted an operating policy under which Smaller Companies will
not purchase securities of companies with individual market capitalizations of
greater than $1 billion.
Smaller Companies may purchase sponsored or unsponsored ADRs, EDRs, and GDRs.
The fund may invest no more than 5% of its total assets in securities issued by
any one company or government, exclusive of U.S. government securities. Although
the fund may invest up to 25% of its assets in a single industry, there is no
present intention of doing so. The fund may invest up to 5% of its total assets
in warrants and invest up to 10% of its total assets in restricted securities,
securities with a limited trading market, and securities which are not otherwise
readily marketable.
Smaller Companies is authorized to invest in medium quality or high risk, lower
quality debt securities (which may include structured investments). As an
operating policy which may be changed by the Board of Directors without
shareholder approval, the fund will not invest more than 5% of its total assets
in debt securities rated lower than BBB by S&P or Baa by Moody's or, if unrated,
of equivalent investment quality as determined by the investment manager. The
fund may, from time to time, purchase defaulted debt securities if, in the
opinion of the investment manager, the issuer may resume interest payments in
the near future. The fund will not invest more than 10% of its total assets in
defaulted debt securities, which may be illiquid. For a description of the risks
associated with investing in high yielding, fixed income securities, including
defaulted securities, see "What are the Underlying Funds' Potential Risks?"
Templeton Foreign Smaller Companies Fund of Franklin Templeton International
Trust ("Foreign Smaller"). The principal investment objective of Foreign Smaller
is to seek to provide long-term growth of capital. Under normal market
conditions, Foreign Smaller invests at least 65% of its total assets in a
diverse international portfolio of equity securities that trade on markets in
countries other than the U.S. and which are issued by companies (i) domiciled in
countries other than the U.S., or (ii) that derive at least 50% of their
revenues or pre-tax income from activities outside of the U.S. Thus it is
possible, although not anticipated, that up to 35% of the fund's assets could be
invested in U.S. companies.
In selecting portfolio securities, Foreign Smaller attempts to take advantage of
the difference between economic trends and the anticipated performance of
securities and securities markets in various countries. Foreign Smaller may
invest in the securities of issuers in, but not limited to, the following
countries: Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada,
Chile, Colombia, Denmark, Finland, France, Germany, Greece, Hong Kong, India,
Indonesia, Italy, Japan, South Korea, Luxembourg, Malaysia, Mexico, the
Netherlands, New Zealand, Norway, Peru, the Philippines, Portugal, Russia,
Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, and the United
Kingdom. It is currently expected that under normal conditions at least 65% of
the fund's total assets will be invested in securities of foreign issuers in at
least three of the countries listed herein.
Under normal market conditions, Foreign Smaller's assets are substantially
invested in equity securities consisting of common and preferred stock, bonds or
preferred stock convertible into common stock, warrants and securities
representing certain underlying international securities such as ADRs and EDRs.
The fund invests predominantly in smaller capitalization foreign equity
securities, i.e., securities with a market capitalization of $1 billion or less
at the time of purchase of issuers located in, or deriving a significant portion
of their revenues from, or for which the principal securities trading market is
in any foreign country, including developing market countries ("foreign smaller
capitalization equity securities"). Under normal market conditions, Foreign
Smaller will have at least 65% of its portfolio in foreign smaller
capitalization equity securities.
Smaller capitalization issuers include relatively new or unseasoned companies
which are in their early stages of development, or small companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. There are greater risks associated with a fund that invests
a substantial portion of its net assets in smaller capitalization equity
securities. For a description of these risks, see "New or Unseasoned Companies"
and "Small Capitalization Stocks" in the Appendix to the prospectus.
Up to 35% of Foreign Smaller's assets may be invested in bonds, fixed-income
debt securities and synthetic securities rated Baa or better by Moody's or BBB
or better by S&P, or that are not rated but determined by management to be of
comparable quality. The fund may invest up to 5% of its portfolio in
non-investment grade bonds issued by both U.S. and foreign issuers, which entail
default and other risks greater than those associated with higher rated
securities. In the event the rating on an issue held in the fund's portfolio is
lowered by a rating service, the change will be considered by the fund in its
evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security. For a description of
these ratings, see the Appendix to the prospectus.
The fund may seek capital appreciation by investing in these debt securities.
Appreciation in the value of these investments may result from changes in
relative foreign currency exchange rates, interest rates or improvement in the
creditworthiness of an issuer. The receipt of income from these debt securities
is incidental to the fund's investment objective of growth of capital. These
debt obligations consist of U.S. and foreign government securities and corporate
debt securities, including Samurai and Yankee bonds, Eurobonds and depositary
receipts.
The fund may invest up to 10% of its net assets in warrants, including warrants
that are not listed on an exchange. The fund may also invest up to 35% of its
assets in synthetic convertible securities. Synthetic convertible securities are
not considered equity securities for purposes of the fund's 65% investment
policy. For a description of synthetic convertible securities, please see
"Convertible Securities, including Enhanced and Synthetic Convertible
Securities" in the Appendix to the prospectus.
Although Foreign Smaller will not invest more than 25% of its assets in any one
industry or the securities issued by any foreign government, the fund may invest
more than 25% of its assets in the securities of issuers in one or more
countries. Consistent with this policy, the fund may invest up to 30% of its
assets in securities issued by Hong Kong companies.
Some of the countries in which the fund invests may not permit direct
investment. Investments in these countries may only be permitted through
government approved investment vehicles. Investing through such vehicles may
involve duplicative or layered fees or expenses and may, as well, be subject to
limitations under the 1940 Act.
The fund may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and/or invest a portion of its assets in high quality
money-market instruments. Any decision to substantially withdraw from the equity
market is reviewed by the fund's Board of Trustees. Money market instruments in
which the fund may invest include, but are not limited to, the following
instruments of U.S. or foreign issuers: government securities; commercial paper;
bank certificates of deposit; bankers' acceptances; and repurchase agreements
secured by any of the foregoing. All such securities will be rated A-1 or A-2 by
S&P or P-1 or P-2 by Moody's or, if unrated, determined by the investment
manager to be of comparable quality.
Templeton Greater European Fund of Templeton Global Investment Trust ("Greater
European"). The principal investment objective of Greater European is long-term
capital appreciation. The fund seeks to achieve its objective by investing
primarily in equity securities of Greater European Companies. The term "Greater
European Company" means a company (i) that is organized under the laws of, or
with a principal office and domicile in, a country in Greater Europe, (ii) for
which the principal equity securities trading market is in Greater Europe, or
(iii) that derives at least 50% of its revenues or profits from goods produced
or sold, investments made, or services performed in Greater Europe or that has
at least 50% of its assets situated in Greater Europe. The term "Greater Europe"
means Western, Central and Eastern Europe (including Ukraine, Belarus, Latvia,
Lithuania and Estonia) and Russia. Greater European may invest without limit in
emerging or developing market countries. As a fundamental policy, Greater
European will limit investments in Russian companies to 5% of its total assets.
Under normal market conditions, the fund will invest at least 75% of its total
assets in the equity securities of Greater European Companies. The balance of
the fund's assets will be invested in (i) debt securities issued by Greater
European Companies or issued or guaranteed by Greater European government
entities, (ii) equity securities and debt obligations of issuers outside Greater
Europe, and (iii) short-term and medium-term debt securities.
Equity securities in which Greater European may invest are common stock,
preferred stock, securities convertible into or exchangeable for such
securities, warrants or rights to subscribe to or purchase such securities, and
sponsored or unsponsored ADRs, EDRs, and GDRs. For capital appreciation, the
fund may invest up to 25% of its total assets in debt securities (defined as
bonds, notes, debentures, commercial paper, time deposits, and bankers'
acceptances, and which may include structured investments) which are rated in
any rating category by Moody's or S&P or which are unrated by any rating agency.
Such securities may include high-risk, lower quality debt securities. The fund
will not invest more than 5% of its total assets in debt securities rated lower
than Baa by Moody's or BBB by S&P. The investment manager will actively manage
Greater European's assets in response to market, political, and general economic
conditions, and will seek to adjust the fund's investments based on its
perception of which investments would best enable the fund to achieve its
investment objective.
The fund may not invest more than 5% of its assets in warrants (exclusive of
warrants acquired in units or attached to securities) or more than 15% of its
assets in securities with a limited trading market. The fund will limit its
investment in restricted securities, other than Rule 144A securities, to 10% of
its total assets.
Templeton Pacific Growth Fund of Franklin Templeton International Trust
("Pacific Growth"). The principal investment objective of Pacific Growth is to
provide long-term growth of capital. Under normal market conditions, the fund
invests at least 65% of its total assets in equity securities that trade on
markets in the Pacific Rim and are issued by companies (i) domiciled in the
Pacific Rim or (ii) that derive at least 50% of their revenues or pre-tax income
from activities in the Pacific Rim.
For purposes of this policy, the countries in the Pacific Rim are Australia,
China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, South Korea, and Thailand. It is currently expected that
under normal conditions at least 65% of the fund's total assets will be invested
in securities of foreign issuers in at least three of those countries.
Although Pacific Growth will not invest more than 25% of its assets in any one
industry or the securities issued by any foreign government, the fund may invest
more than 25% of its assets in the securities of issuers in one or more
countries. Consistent with this policy, Pacific Growth may invest up to 30% of
its assets in securities issued by Hong Kong companies.
Pacific Growth may invest up to 35% of its assets in the securities of issuers
domiciled outside of the Pacific Rim. These investments may include securities
of issuers (i) in countries that are not located in the Pacific Rim but are
linked by tradition, economic markets, cultural similarities, or geography to
countries in the Pacific Rim; and (ii) located elsewhere in the world which have
operations in the Pacific Rim or which stand to benefit from political and
economic events in the Pacific Rim.
Under normal conditions, the fund's assets are substantially invested in equity
securities consisting of common and preferred stock, bonds or preferred stock
convertible into common stock, warrants, and securities representing certain
underlying international securities such as ADRs. Pacific Growth may, from time
to time, hold significant cash positions until suitable investment opportunities
are available, consistent with its policy on short-term investments.
Up to 35% of Pacific Growth's total assets may be invested in investment grade
bonds, fixed-income debt securities, and synthetic securities rated Baa or
better by Moody's or BBB or better by S&P or that are unrated but determined to
be of comparable quality. The fund may seek capital appreciation by investing in
these debt securities. Debt obligations in which the fund may invest include
U.S. and foreign government securities and corporate debt securities, including
Samurai and Yankee bonds, Eurobonds, and depositary receipts. The issuers of
these debt securities may or may not be domiciled in the Pacific Rim.
Pacific Growth may invest up to 10% of its net assets in warrants, including
warrants that are not listed on an exchange. The fund may invest up to 35% of
its assets in synthetic convertible securities. Synthetic convertible securities
are not considered equity securities for purposes of the fund's 65% investment
policy.
Pacific Growth may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and/or invest a portion of its assets in high-quality money
market instruments to the same extent and subject to the same rating
requirements as Foreign Smaller.
Templeton Latin America Fund of Templeton Global Investment Trust ("Latin
America"). The investment objective of Latin America is long-term capital
appreciation. The fund seeks to achieve its objective by investing primarily in
equity and debt securities of issuers in the following Latin American countries:
Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Ecuador,
El Salvador, French Guyana, Guatemala, Guyana, Honduras, Mexico, Nicaragua,
Panama, Paraguay, Peru, Surinam, Trinidad/Tobago, Uruguay, and Venezuela. Latin
America may invest without limit in emerging market or developing countries.
Under normal market conditions, Latin America will invest at least 65% of its
total assets in equity and debt securities of issuers in the countries named
above. The balance of the fund's assets will be invested in (i) equity
securities and debt obligations of companies and government entities of
countries other than those named above, and (ii) short-term and medium-term debt
securities.
Latin America may invest in the same types of equity securities, and for capital
appreciation may invest without limit in the same types of debt securities, as
Greater European. Latin America will not invest more than 5% of its total assets
in debt securities rated lower than Baa by Moody's or BBB by S&P. The investment
manager will actively manage Latin America's assets in response to market,
political and general economic conditions, and will seek to adjust Latin
America's investments based on its perception of which investments would best
enable the fund to achieve its investment objective.
The fund may not invest more than 5% of its assets in warrants (exclusive of
warrants acquired in units or attached to securities) or more than 15% of its
assets in securities with a limited trading market. Latin America will limit its
investment in restricted securities, other than Rule 144A securities, to 10% of
its total assets.
Latin America may invest without limit in certain debt obligations customarily
referred to as "Brady Bonds," which are created through the exchange of existing
commercial bank loans to sovereign entities for new obligations in connection
with debt restructuring under a plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds are not considered
U.S. government securities and are considered speculative. Brady Plan debt
restructurings have been implemented to date in several countries, including
Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador,
Jordan, Mexico, Nigeria, the Philippines, Uruguay, and Venezuela (collectively,
the "Brady Countries"). It is expected that other countries will undertake a
Brady Plan debt restructuring in the future, including Panama, Peru, and Poland.
Brady Bonds have been issued only recently and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds which have the same maturity as
the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed-rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments, but generally are not collateralized. Brady Bonds are often viewed as
having three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
Franklin Templeton Japan Fund ("Japan"). The investment objective of Japan is
long-term capital growth. The fund seeks to achieve its objective through
investing its assets primarily in securities of companies domiciled in Japan and
traded in the Japanese securities markets. A company is considered domiciled in
Japan if it is organized under the laws of Japan, at least half of its assets
are located in Japan and it normally derives at least half of its income from
operations or sales in Japan, or if its principal activities are in Japan. Up to
20% of Japan's total assets may be invested in securities of non-Japanese
issuers, including issuers in underdeveloped countries.
Japan's investments will consist of common stocks, common stock equivalents
(convertible debt securities and warrants), preferred stocks and debt securities
issued by domestic and foreign corporations, domestic and foreign governments
and supranational organizations such as the World Bank, the European Investment
Bank and the Asian Development Bank.
Under normal circumstances at least 80% of Japan's assets will be invested in
equity securities of Japanese issuers. Equity securities in which the fund may
invest are common stock, preferred stock, warrants or rights to subscribe to or
purchase such securities, and sponsored or unsponsored ADRs and GDRs. Securities
considered for purchase by the fund may be listed or unlisted, and may be issued
by companies in various industries, with various levels of market
capitalization.
Japan may invest in emerging growth companies. Japan Fund has established no
criteria regarding the minimum market capitalization of the companies in which
it may invest. While they may offer greater opportunities for capital
appreciation than larger, more established companies, investments in smaller,
emerging growth companies may involve greater risks and thus may be considered
speculative. See "New or Unseasoned Companies" and "Small Capitalization Stocks"
in the Appendix to the prospectus.
Consistent with Japan's objective of seeking long-term capital growth, the fund
may purchase debt, as well as equity securities, issued by private and
governmental issuers. Although the fund would not anticipate that its debt
investments would achieve the same levels of growth as its equity investments,
nevertheless, such investments fluctuate in value based upon changes in such
factors as the general level of interest rates and credit quality, and may be
expected to offer attractive growth opportunities. Additionally, convertible
bonds offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bonds to benefit from increases in the
market price of the securities into which they are convertible.
Japan may invest in debt securities (defined as bonds, notes, debentures,
commercial paper, time deposits, and bankers' acceptances, and which may include
structured investments) which are rated in any rating category by Moody's or S&P
or which are unrated by any rating agency. Such securities may include high
risk, lower quality debt securities. Japan will not invest more than 5% of its
total assets in debt securities rated lower than Baa by Moody's or BBB by S&P.
Japan may invest in yen-denominated bonds sold in Japan by non-Japanese issuers
("Samurai Bonds") and may invest in dollar-denominated bonds sold in the United
States by non-U.S. issuers ("Yankee Bonds"). As compared with bonds issued in
their countries of domicile, such bond issues normally carry a higher interest
rate but are less actively traded. Samurai Bonds and Yankee Bonds are subject to
the risks associated with other debt instruments and with securities of foreign
issuers.
Government securities in which Japan may invest consist of debt securities
issued by the U.S. Treasury which are direct obligations of the U.S. government,
including bills (maturity of one year or less), notes (maturities of one to 10
years) and bonds (generally maturities of greater than 10 years), and debt
securities issued or guaranteed by U.S. government-sponsored instrumentalities
and federal agencies, including FNMA, Federal Home Loan Banks and the Federal
Housing Administration. Mortgage-backed U.S. government securities, such as FNMA
certificates, are highly sensitive to prepayment and interest rates. Prepayments
on a pool of mortgage loans are influenced by a variety of economic, geographic,
social and other factors. Generally, however, prepayments on fixed rate mortgage
loans will increase during a period of falling interest rates and decrease
during a period of rising interest rates. Accordingly, to the extent of Japan's
investment in mortgage-backed securities, amounts available for reinvestment by
the fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Japan may also invest in obligations
issued or guaranteed by a foreign government or any of its political
subdivisions, authorities, agencies, or instrumentalities which are rated in any
category, as described above, or which are unrated by any rating agency.
Japan will limit its investment in restricted securities other than Rule 144A
securities to 10% of its total assets. The Tokyo Stock Exchange has a large
volume of trading and the investment manager believes that securities of
companies traded in Japan are generally as liquid as securities of comparable
U.S. companies.
International Fixed-Income Funds
Franklin Templeton Hard Currency Fund of Franklin Templeton Global Trust ("Hard
Currency"). The investment objective of Hard Currency is to protect against
depreciation of the U.S. dollar relative to other currencies. The fund seeks to
achieve its objective by investing in high-quality money market instruments (and
forward contracts) denominated in foreign major currencies which historically
have experienced low rates of inflation and which, in the view of the investment
manager, are pursuing economic policies conducive to continued low rates of
inflation in the future and currency appreciation versus the U.S. dollar over
the long-term. Such currencies are often referred to as "hard currencies" and
such economic policies are often referred to as "sound money" policies.
Hard Currency endeavors, to the maximum extent practicable, to maintain foreign
currency (non-U.S. dollar) exposure with respect to 100% of its net assets at
all times. The fund may invest without limitation in U.S. dollar-denominated
money market instruments in combination with forward contracts (calling for the
future acquisition of foreign currencies in exchange for U.S. dollars) for the
purpose of obtaining an investment result that is substantially equivalent to a
direct investment in foreign currency-denominated instrument.
Under normal market conditions, Hard Currency will not maintain exposure to a
single foreign currency in excess of 50% of its total assets. For temporary
defensive purposes, however, this fund may invest without limitation in Swiss
franc-denominated instruments.
Subject to specific restrictions described more fully below, the fund may invest
in money market instruments denominated in the following currencies (the "major
currencies"): Australian dollar, Belgian franc, British pound sterling, Canadian
dollar, Danish krone, Netherlands guilder, European Currency Unit ("ECU"),
French franc, German mark, Italian lira, Japanese yen, New Zealand dollar,
Spanish peseta, Swedish krona, Swiss franc, and U.S. dollar. The currencies of
various countries may be added to or deleted from the foregoing list of major
currencies when, in the opinion of the investment manager, world social,
economic, financial or political conditions so warrant.
Hard Currency will attempt to maintain a weighted average effective maturity of
120 days or less and will acquire only money market instruments that have an
effective maturity, at the time of purchase, of one year or less. These
securities include floating or variable rate obligations that may have actual
maturities of over one year but that have interest rates which adjust at
periodic intervals. The effective maturity of each floating or variable rate
obligation within the fund's portfolio will be based upon these periodic
adjustments. Because the fund invests primarily in short-term securities which
are excluded from the calculation of portfolio turnover rate, the portfolio
turnover rate for the fund is usually minimal.
The issuers of money market instruments in which Hard Currency may invest may
include governments of, and financial institutions, corporations or other
entities located in or organized under the laws of, any country. The fund may
also invest in money market securities issued by supranational organizations
such as: The World Bank, which was chartered to finance development projects in
member countries; the European Economic Community, which is a twelve-nation
organization engaged in cooperative economic activities; the European Coal and
Steel Community, which is an economic union of various European nations' steel
and coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment, and provide
technical assistance to member nations in the Asian and Pacific regions.
Hard Currency invests only in instruments which are considered by the investment
managers to be of high quality, comparable to those (1) rated AAA or AA (A-1 for
commercial paper) by S&P or Aaa or Aa (P-1 for commercial paper) by Moody's or
(2) issued by companies having an outstanding unsecured debt issue currently
rated within the above rating categories by S&P or Moody's.
Money market instruments in which the fund may invest include short-term U.S.
government securities, bank certificates of deposit, time deposits, bankers'
acceptances, commercial paper, floating and variable rate notes, repurchase
agreements secured by U.S. government securities, and short-term liquid
instruments issued by foreign governments and supranational organizations. The
fund will invest in government securities only when the investment manager is
satisfied that the credit risk with respect to the issuer is minimal.
Securities issued by the governments of foreign countries may include direct
obligations and obligations guaranteed by the governments of the foreign
countries. These obligations may have fixed, floating or variable rates of
interest.
Under normal market conditions, Hard Currency will have at least 25% of its
assets invested in companies engaged in the financial services industry,
including banks (U.S. and non-U.S. banks and their branches), savings and loan
associations, insurance companies, and their holding companies, provided such
companies have total assets in excess of U.S. $1 billion (or the equivalent
thereof expressed in a foreign currency). These investments may include bank
obligations, such as certificates of deposit, time deposits, and bankers'
acceptances. During periods when the investment managers determine that the fund
should be in a temporary defensive position, the fund may have less than 25% of
its assets concentrated in the financial services industry.
Templeton Global Bond Fund of Templeton Income Trust ("Global Bond"). The
investment objective of Global Bond is current income with capital appreciation
and growth of income. The fund seeks to achieve its objective through a flexible
policy of investing primarily in debt securities of companies, governments, and
government agencies of various nations throughout the world, as well as
preferred stock, common stocks which pay dividends, income-producing securities
which are convertible into common stock of such companies, and sponsored and
unsponsored ADRs, EDRs, and GDRs. The fund's investments in common stocks will
emphasize companies, in various countries and industries, which pay dividends
and may offer prospects for further growth in dividend payments and capital
appreciation.
Global Bond may invest in any debt security (which may include structured
investments), including securities rated in any category by S&P or Moody's and
securities which are unrated by any rating agency. As an operating policy, the
fund will not invest more than 35% of its total assets in debt securities rated
lower than BBB by S&P or Baa by Moody's. The fund will not invest more than 10%
of its total assets in defaulted debt securities, which may be illiquid. For a
description of the risks associated with investing in high yielding, fixed
income securities, including defaulted securities, see "What are the Underlying
Funds' Potential Risks?" The average maturity of the debt securities in the
fund's portfolio will fluctuate depending upon the investment manager's judgment
as to future interest rate changes.
Although Global Bond may invest up to 25% of its assets in a single industry,
there is no present intention of doing so. As a non-fundamental policy approved
by the Board of Trustees, the investment manager will select securities for
purchase by the fund from many industries that it believes to be productive and
beneficial.
The fund may invest up to 5% of its total assets in securities that may not be
resold without registration under applicable law ("restricted securities"). The
fund may invest up to 10% of its total assets in restricted securities and other
securities which are not restricted but which are not readily marketable (i.e.,
trading in the security is suspended or, in the case of unlisted securities,
market makers do not exist or will not entertain bids or offers).
Franklin Global Government Income Fund of Franklin Investors Securities Trust
("Global Government"). The fund's principal investment objective is to provide
high current income, consistent with preservation of capital, with capital
appreciation as a secondary consideration.
Global Government seeks to achieve its objective by investing primarily in
securities issued by both domestic and foreign governments and their political
subdivisions. Investments will be selected to provide a high current yield and
currency stability, or a combination of yield, capital appreciation or currency
appreciation consistent with the fund's objective.
As a global fund, Global Government may invest in securities issued in any
currency and may hold foreign currency. Under normal circumstances, at least 65%
of the fund's assets will be invested in government securities of issuers
located in at least three countries, one of which may be the United States.
Securities of issuers within a given country may be denominated in the currency
of another country, or in multinational currency units such as the European
Currency Unit ("ECU").
Global Government is authorized to invest in securities issued by domestic and
foreign governments and their political subdivisions, including the U.S.
government, its agencies, and authorities or instrumentalities ("U.S. government
securities") and supranational organizations (as described below) and in
securities issued by foreign and domestic corporations, banks, and other
business organizations. There are no restrictions or limitations on investments
in obligations of the United States, or of corporations chartered by the U.S.
Congress as federal government instrumentalities.
Under normal economic conditions, at least 65% of Global Government's total
assets will be invested in fixed-income securities such as bonds, notes and
debentures. Some of the fixed-income securities may be convertible into common
stock or be traded together with warrants for the purchase of common stocks,
although the fund has no current intention of converting such securities into
equity or holding them as equity upon such conversion. The remaining 35% may be
invested, to the extent available and permissible, in equity securities, foreign
or domestic currency deposits or equivalents such as short-term U.S. Treasury
notes or repurchase agreements.
Global Government may invest in debt securities with varying maturities. Under
current market conditions, it is expected that the dollar-weighted average
maturity of the fund's investments will not exceed 15 years. Generally, the
portfolio's average maturity will be shorter when, in the opinion of the
investment manager, interest rates worldwide or in a particular country are
expected to rise, and longer when interest rates are expected to fall.
Other fixed-income securities of both domestic and foreign issuers in which the
fund may invest include preferred and preference stock and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment trust certificates and
conditional sales contracts. For a discussion of these equipment related
instruments, see "Equipment Related Instruments" in the Appendix to this
prospectus. These fixed-income securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participation based on revenues, sales or profits;
or the purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit). Global Government will limit
its investments in warrants, valued at the lower of cost or market, to 5% of the
fund's net assets or to warrants attached to securities.
Global Government is also authorized to invest in debt securities of
supranational entities denominated in any currency. A supranational entity is an
entity designated or supported by the national government of one or more
countries to promote economic reconstruction or development. Examples of
supranational entities include, among others, the World Bank, the European
Investment Bank and the Asian Development Bank. The fund may, in addition,
invest in debt securities denominated in ECU of an issuer in any country
(including supranational issuers). Global Government is further authorized to
invest in "semi-governmental securities," which are debt securities issued by
entities owned by either a national, state or equivalent government or are
obligations of a government jurisdiction that are not backed by its full faith
and credit and general taxing powers.
Global Government may invest in obligations of domestic and foreign banks which,
at the date of investment, have total assets (as of the date of their most
recently published financial statements) in excess of one billion dollars (or
foreign currency equivalent at then current exchange rates).
Global Government is also authorized to acquire loan participations.
Global Government will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its objective based upon relative interest rates among currencies, the
outlook for changes in these interest rates, and anticipated changes in
worldwide exchange rates. In considering these factors, a country's economic and
political conditions such as inflation rate, growth prospects, global trade
patterns and government policies will be evaluated.
Global Government's assets will be invested principally within Australia,
Canada, Japan, New Zealand, the U.S. and Western Europe, and in securities
denominated in the currencies of these countries or denominated in multinational
currency units such as the ECU. The fund may also acquire securities, including
fixed-income obligations of governments, government agencies and corporations,
and currency in less developed countries and in developing countries. The
investment manager does not currently expect the fund's investments in less
developed and developing countries to exceed 20% of the fund's net assets.
Global Government may invest in higher yielding, higher risk, lower rated debt
obligations that are rated at least B by Moody's or S&P or, if unrated, are at
least of comparable quality as determined by the investment manager; such
investments will be less than 35% of the fund's net assets. For a description of
these ratings, see the Appendix. For a description of the risks associated with
investing in high yielding, fixed income securities, see "What are the
Underlying Funds' Potential Risks?" Many debt obligations of foreign issuers,
especially developing market issuers, are not rated by U.S. rating agencies and
their selection depends on the investment manager's internal analysis.
Under normal market conditions, Global Government will have at least 65% of its
total assets invested in securities issued or guaranteed by domestic and foreign
governments. Securities issued by central banks that are guaranteed by their
national governments are considered to be government securities. Bonds of
foreign governments or their agencies which may be purchased by the fund may be
less secure than those of U.S. government issuers.
During periods when the investment manager believes that the fund should be in a
temporary defensive position, the fund may have less than 25% of its assets
concentrated in foreign government securities and may invest instead in U.S.
government securities. U.S. government securities which may be purchased by the
fund may include (i) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturities of one to 10 years), and
U.S. Treasury bonds (generally maturities of greater than 10 years), all of
which are backed by the full faith and credit of the U.S. government; and (ii)
obligations issued or guaranteed by U.S. government agencies or
instrumentalities, some of which are backed by the full faith and credit of the
U.S. Treasury (e.g., direct pass-through certificates of the Government National
Mortgage Association); some of which are supported by the right of the issuer to
borrow from the U.S. government (e.g., obligations of Federal Home Loan Banks);
and some of which are backed only by the credit of the issuer itself (e.g.,
obligations of the Student Loan Marketing Association).
Global Government may invest no more than 10% of the value of its net assets in
restricted securities, (other than certain Rule 144A securities) or in other
securities which, in the opinion of the fund's investment manager, may be
otherwise illiquid.
Franklin Templeton German Government Bond Fund of Franklin Templeton Global
Trust ("German Bond"). The investment objective of German Bond is to seek, over
the long-term, total return through investment in a managed portfolio of German
government bonds.
German Bond invests between 65% and 100% of its total assets in debt obligations
issued or guaranteed by the Federal Republic of Germany, its agencies,
instrumentalities and political subdivisions ("German government obligations").
The German government obligations in which German Bond invests are denominated
in the German mark and are rated, at the time of purchase, triple A by a U.S.
nationally recognized rating service, such as S&P or Moody's, or, if unrated,
are considered by the fund's investment managers to be of comparable quality to
triple A rated instruments.
Consistent with its investment objective, German Bond may also invest up to 35%
of its total assets in (i) German mark-denominated bonds and other debt
instruments issued by sovereign governments other than the Federal Republic of
Germany and by supranational organizations (such as the World Bank) that are
rated, at the time of purchase triple A by a U.S. nationally recognized rating
service, such as S&P or Moody's, or which, if unrated, are considered by the
fund's investment managers to be of comparable quality to triple A rated
instruments; and (ii) cash and money market instruments denominated in the
German mark which are rated at time of purchase A-1+ by S&P and/or P-1 by
Moody's, or which, if unrated, are considered by the fund's investment managers
to be of comparable high quality.
Under normal market conditions, German Bond may have up to 5% of its total
assets invested in U.S. dollar denominated cash and money market instruments,
such as U.S. Treasury bills, to provide extra liquidity for meeting shareholder
redemptions and exchanges.
While German Government does not anticipate that it will have less than 75% of
its total assets invested in German government obligations under normal market
conditions, the fund reserves the right to reduce its investment in German
government obligations to 65% of its total assets (with a corresponding increase
in the amount it invests in other German mark-denominated securities and cash)
if such investment allocation is deemed to be in German Bond's best interest by
the fund's investment managers. It is also possible that German Bond may
occasionally hold significant cash or cash equivalents denominated in German
marks until suitable investment positions are available. In order to preserve
its favorable tax status, the fund may regularly hold 25% or less of its assets
in obligations issued or guaranteed by the Federal Republic of Germany even
while holding 65% or more of its total assets in German government obligations
(as defined above). In addition, as a temporary measure, German Bond may reduce
its investment in German government obligations and/or increase its investment
in U.S. government and agency securities from time to time to preserve its
favorable tax status.
The rate of exchange between the U.S. dollar and the German mark fluctuates. As
a result, German Bond generally will experience gains and losses attributable to
those fluctuations. German Bond does not generally position hedge or otherwise
attempt to limit its exposure to German mark currency risk and, therefore, there
is the risk of currency fluctuations.
Changes in German market interest rates will affect the market value of the
fund. When German market interest rates rise, the market value of German Bond's
securities generally will decline. Conversely, when German market interest rates
decline, the market value of the fund's securities generally will rise. German
Bond's investment managers will actively manage the fund's portfolio maturity
structure in an attempt to achieve positive returns for the fund over time from
changes in interest rates.
It is anticipated that under normal market conditions, German Bond's weighted
average portfolio maturity will be at least five years and may be as long as ten
years. For temporary, defensive purposes, however, the fund's weighted average
portfolio maturity may be less than five years.
German Bond's investment managers invest the fund's assets on the basis of a
number of factors, including, (i) the current level of interest rates on German
government obligations of various maturities and (ii) its view of future
movements of those interest rates. In determining German Bond's maturity
structure, the fund's investment managers consider many factors pertaining to
the German economy, including the current stage of the economic cycle,
government fiscal and monetary policy, inflation expectations, the relationship
of interest rates of varying maturities, (i.e., the slope of the yield curve),
currency market outlook, and economic growth prospects within Germany and around
the world.
German government obligations generally are considered by rating agencies to be
among the highest credit quality debt instruments worldwide. In addition, the
Bundesbank (the German central bank) generally is viewed as among the most
disciplined and ardent central banks in the world in its policies of fighting
domestic inflation and protecting the international value of the German mark.
Liquidity in the German government bond market is considered by the fund's
investment managers to be very high.
Certain German government obligations are issued or otherwise guaranteed by the
Federal Republic of Germany. These obligations carry the explicit full faith and
credit backing of the German government and include direct obligations of the
government (Bunds), as well as certain government agency issues, such as the
German Unity Fund (Fonds Deutsche Einheit), established to help pay for the
reconstruction of former East Germany's economy, and the Treuhandanstalt,
established to facilitate the privatization of assets of former East Germany.
Other German government obligations are guaranteed by their issuing agency,
instrumentality or political subdivision, but do not carry the explicit full
faith and credit guarantee of the German government. German Bond will invest
only in such obligations that the fund's investment managers consider to be of
credit quality substantially equivalent to direct obligations of the German
government. Issuers presently satisfying this criterion include the German
Federal Railways (Bundesbahn), the German Post Office (Bundespost), the
Kreditanstalt fur Wiederaufbau ("KFW"), as well as certain of the 16 separate
federal states (Lander) of which Germany is comprised.
For a discussion of the primary risk factors associated with investment in
German government obligations, including interest rate, currency and German
economic risk, please see "German Government Bonds" in the Appendix to this
prospectus.
In the event of an extraordinary political or world development which, in the
view of the fund's investment managers, threatens the social or political
stability of Germany or the viability of the German government, German Bond may
invest in U.S. government securities and U.S. dollar-denominated cash
equivalents or otherwise hedge its German bond and currency risk, without
limitation, but only for temporary, defensive purposes.
German Government may invest in time deposits of commercial banks having
short-term deposit ratings of A-1+ by S&P and/or P-1 by Moody's, but will limit
its investment in time deposits maturing in more than seven days. German
Government will not otherwise invest in illiquid securities.
Natural Resources Funds
Franklin Gold Fund ("Gold"). The principal investment objective of Gold is
capital appreciation. Gold's secondary objective is to provide current income
through the receipt of dividends or interest from its investments. The payment
of dividends may be a consideration when the fund purchases securities.
In seeking to achieve its objectives, Gold has adopted a fundamental policy of
concentrating its investments in securities of issuers engaged in mining,
processing or dealing in gold or other precious metals, such as silver,
platinum, and palladium, which means that the fund will invest at least 25% of
its total assets in such securities. Under normal circumstances, at least 65% of
the value of the fund's total assets will be invested in securities of issuers
engaged in gold operations, including securities of gold mining finance
companies, as well as operating companies with long, medium, or short-life
mines.
Gold anticipates that it will normally invest in common stocks and securities
convertible into common stocks, such as convertible preferred, convertible
debentures, convertible rights and warrants, and sponsored or unsponsored ADRs
for those securities, all of which may be traded on a securities exchange or
over-the-counter. The fund may invest in debt obligations and preferred stocks
which are convertible within a specified period of time into a certain quantity
of the common stock of the same or a different issuer. In seeking income or
appreciation or in times when it is felt that a conservative investment policy
is in order, the fund may also purchase preferred stocks and debt securities,
such as notes, bonds, debentures or commercial paper (short-term debt securities
of large corporations), any of which may or may not be rated by recognized
securities rating agencies. In addition, Gold's investment in fixed income and
convertible securities which are rated or unrated but deemed equivalent to
comparable rated securities, may be below investment grade (i.e. below BBB by S
& P or Baa by Moody's) at the time of purchase. In those circumstances, the fund
may also place some of its cash reserves in securities of the U.S. government
and its agencies, various bank debt instruments, or repurchase agreements
collateralized by such securities.
Because of the fund's policy of investing primarily in securities of companies
engaged in gold mining, a substantial part of Gold's assets generally is
invested in securities of companies domiciled or operating in one or more
foreign countries. The fund generally has invested more than 50% of its total
assets in the securities of corporations located outside the United States.
While the fund intends to acquire securities of foreign issuers only where there
are public trading markets for such securities, such investments may tend to
reduce the liquidity of the fund's portfolio in the event of internal problems
in such foreign countries or deteriorating relations between the United States
and such countries.
When purchasing foreign securities, the fund will ordinarily purchase securities
which are traded in the United States or purchase sponsored or unsponsored ADRs.
The fund may also purchase the securities of foreign issuers directly in foreign
markets so long as, in the investment manager's judgment, an established public
trading market exists.
As a means of seeking its principal objective of capital appreciation and when
it is felt to be appropriate as a possible hedge against inflation, Gold may
invest a portion of its assets in gold bullion and may hold a portion of its
cash in foreign currency in the form of gold coins. The ability of the fund to
make such investments may be further restricted by the securities laws and
regulations in effect from time to time in the states where the fund's shares
are qualified for sale. If otherwise consistent with the fund's objectives, it
may invest up to 10% of its assets in gold bullion.
Gold's assets will be invested in gold bullion at such times as the prospects of
such investments are, in the opinion of management, attractive in relation to
other possible investments. Transactions in gold bullion by the fund are
negotiated with principal bullion dealers unless, in the investment manager's
opinion, more favorable prices are otherwise obtainable. Prices at which gold
bullion is purchased or sold include dealer mark-ups or mark-downs, insurance
expenses, assay charges, and shipping costs for delivery to a custodian bank.
Such costs and expenses may be a greater or lesser percentage of the price from
time to time, depending on whether the price of gold bullion decreases or
increases. Since gold bullion does not generate any investment income, the only
source of return to the fund on such investment will be from any gains realized
upon its sale, and negative return will be realized, of course, to the extent
the fund sells its gold bullion at a loss.
Franklin Natural Resources Fund of Franklin Strategic Series ("Natural
Resources"). The investment objective of Natural Resources is to seek to provide
high total return. The fund seeks to achieve its objective by investing at least
65% of its total assets in securities issued by companies which own, produce,
refine, process and market natural resources, as well as those that provide
support services for natural resources companies (i.e., those that develop
technologies or provide services or supplies directly related to the production
of natural resources). These companies are concentrated in the natural resources
sector which includes, but is not limited to, the following industries:
integrated oil; oil and gas exploration and production; gold and precious
metals; steel and iron ore production; aluminum production; forest products;
farming products; paper products; chemicals; building materials; energy services
and technology; and environmental services. The fund's total return consists of
both capital appreciation and current dividend and interest income.
Natural Resources at all times, except during temporary defensive periods, seeks
to maintain at least 65% of its total assets invested in securities issued by
companies in the natural resources sector and will be concentrated in the
natural resources sector. Natural Resources invests in common stocks (including
preferred or debt securities convertible into common stocks), preferred stocks,
and debt securities. The mixture of common stocks, debt securities, and
preferred stocks varies from time to time based upon the investment manager's
assessment as to whether investments in each category will contribute to meeting
the fund's investment objective.
Natural Resources may invest, without percentage limitation, in fixed-income
securities having at the time of purchase one of the four highest ratings of
Moody's or S&P, or in fixed-income securities that are not so rated, provided
that, in the opinion of the investment manager, such securities are comparable
in quality to those within the four highest ratings. The fund's commercial paper
investments at the time of purchase will be rated "A-1" or "A-2" by S&P or
"Prime-1" or "Prime-2" by Moody's or, if not so rated, will be of comparable
quality as determined by the investment manager. Natural Resources may also
invest up to 15% of its total assets at the time of purchase in lower rated
fixed-income securities (those rated BB or lower by S&P or Ba or lower by
Moody's) and unrated securities of comparable quality. Natural Resources will
not acquire such securities rated lower than B by Moody's or S&P.
Natural Resources may invest in the securities of issuers both within and
outside the U.S., including emerging market countries. The fund may purchase
foreign securities that are traded in the U.S. or in foreign markets or purchase
sponsored or unsponsored ADRs. The fund's investment manager will attempt to
independently accumulate and evaluate information with respect to the issuers of
the underlying securities of sponsored and unsponsored ADRs to attempt to limit
the fund's exposure to the market risk associated with such investments. For
purposes of Natural Resources' investment policies, investments in ADRs will be
deemed to be investments in the equity securities of the foreign issuers into
which they may be converted.
Under normal conditions, it is anticipated that the percentage of assets
invested in U.S. securities will be higher than that invested in securities of
any other single country. It is possible that at times the fund may have 50% or
more of its total assets invested in foreign securities.
Natural Resources is permitted to invest up to 35% of its assets in securities
of issuers that are outside the natural resources sector. Such investments will
consist of common stocks, debt securities or preferred stocks and will be
selected to meet the fund's investment objective of providing high total return.
These securities may be issued by either U.S. or non-U.S. companies,
governments, or governmental instrumentalities. Some of these issuers may be in
industries related to the natural resources sector and, therefore, may be
subject to similar risks.
The fund may invest in debt securities issued or guaranteed by foreign
governments. Such securities are typically denominated in foreign currencies and
are subject to the currency fluctuation and other risks of foreign securities
investments. The foreign government securities in which Natural Resources
intends to invest generally will consist of obligations issued by national,
state, or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
including international organizations designed or supported by governmental
entities to promote economic reconstruction or development and international
banking institutions and related government agencies. Examples include the
International Bank of Reconstruction and Development (the World Bank), the
European Investment Bank, the Asian Development Bank, and the Inter-American
Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the 12-member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities, including quasi-governmental agencies.
Other Investment Policies of the Underlying Funds
Options and Financial Futures. Certain of the Underlying Funds may use certain
investment techniques, all of which may be dependent upon a prediction of the
future direction of various financial barometers. In this regard, Equity, Small
Cap, Real Estate, Gold, Mutual Shares, Discovery Shares, Pacific Growth, Foreign
Smaller, Global Government, Global Bond, Latin America, Japan, Greater European,
and Developing Markets may purchase and sell put and call options on securities
and securities indices which trade on securities exchanges, which may include
foreign exchanges, and in the over-the-counter ("OTC") market. These funds,
along with Value and Natural Resources, also may purchase and sell financial
futures and options on financial futures with respect to securities and
securities indices.
Pacific Growth, Foreign Smaller, Global Government and Value may engage in
"spread" and "straddle" transactions. A spread transaction is one in which a
fund purchases and writes a put or call option on the same underlying security,
with the options having different exercise prices and/or expiration dates. In a
straddle transaction, the fund purchases or writes combinations of put and call
options on the same security.
Growth and Utilities may write (sell) covered call options which are listed for
trading on a national securities exchange. Writing a "covered" call option means
that the fund will only write (sell) options on securities which it actually
owns. When a fund sells covered call options, it will receive a cash premium
which can be used in whatever way is felt to be most beneficial to the fund.
Growth may also purchase put options on securities. Put options on particular
securities may be purchased to protect against a decline in the market value of
the underlying security below the exercise price less the premium paid for the
option. Growth may sell a put option which it has previously purchased prior to
the sale of the securities underlying such option.
Value may write covered call options on securities that are listed on a national
securities exchange or traded OTC and purchase listed and OTC call and put
options on securities and securities indices. Value may engage in forward
conversion transactions whereby the fund will write call options on securities
it has purchased and purchase put options on those securities. Pacific Growth,
Foreign Smaller, Global Government, Global Bond, Equity, Real Estate, Small Cap,
Greater European, Latin America and Japan may write covered call and put options
on securities and securities indices that are traded on exchanges or in the OTC
market.
Investment Grade may write covered call and put options on any securities it may
purchase for its portfolio. The fund may purchase call and put options for the
purpose of offsetting its obligations pursuant to previously written options.
The fund may purchase put options only on U.S. government securities in its
portfolio in anticipation of a decline in the market value of such securities.
Global Government may write options in connection with buy-and-write
transactions; that is, it may purchase a security and then write a call option
against that security. The exercise price will depend upon the expected price
movement and may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the security. Global Government may
enter into futures on debt securities that are backed by the U.S. government and
may enter into futures on corporate securities and non-U.S. government debt
securities when such securities become available.
German Government may use futures, option contracts on futures, and OTC options
on a temporary basis to maintain its ongoing exposure to the German mark and to
German government obligations. However, it does not currently intend to enter
into currency futures or options thereon. Only under extraordinary circumstances
will the fund employ forwards, futures and options for hedging purposes.
Mutual Shares' and Discovery Shares' OTC option transactions are limited to
transactions with U.S. government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers" or broker-dealers, domestic or
foreign banks, or other financial institutions which have received a short term
credit rating of A-1 from S&P or P-1 from Moody's, or are of comparable quality.
Mutual Shares or Discovery Shares may not purchase or sell put options on
futures on individual corporate debt and individual equity securities.
The options and futures transactions of many of the Underlying Funds, as
described above, have limited purposes. For example, as to options and futures,
Gold and Value, and as to futures only, Global Bond, Pacific Growth and Foreign
Smaller may only engage in such activities for hedging purposes or other
appropriate risk management purposes. Real Estate may only engage in options and
futures transactions, and Pacific Growth and Foreign Smaller may only engage in
options transactions for hedging purposes or to increase income to such funds.
Equity may only engage in options and futures transactions for hedging purposes
or to accommodate cash flows. Investment Grade may purchase and sell put and
call options on interest rate futures contracts solely for hedging purposes.
Mutual Shares and Discovery Shares may only engage in futures and options for
non-hedging purposes if no more than 5% of their respective assets are at risk.
The futures activities of all of the Underlying Funds will be accomplished so
that no fund is considered to be a commodity pool operator under the laws
governing the trading of commodities. In this regard, the activities of the
Underlying Funds will be limited so that if an Underlying Fund engages in
futures transactions for other than bona fide hedging purposes, such Underlying
Fund does not enter into a futures transaction if, immediately thereafter, the
sum of the amount of initial margin deposits and premiums paid for such open
futures options would exceed 5% of the Underlying Fund's total assets, after
taking into account unrealized profits and unrealized losses on such contracts
it has entered into; provided however, that, in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5%. In addition, a number of the Underlying Funds have committed
to limit their options and futures transactions to various percentages, as
determined by certain state laws, or internal fund policies.
For a further description of these techniques, see the SAI.
Interest Rate Futures and Options thereon. Value, Pacific Growth, Foreign
Smaller, Mutual Shares, Discovery Shares, Global Government and Natural
Resources may enter into interest rate futures contracts and options thereon.
Investment Grade may purchase options on interest rate futures. Interest rate
futures contracts are contracts for the future delivery of U.S. government
securities and index-based futures contracts. The value of these instruments
changes in response to changes in the value of the underlying security or index,
which depend primarily on prevailing interest rates.
Currency Futures Contracts and Options thereon. Equity, Small Cap, Pacific
Growth, Foreign Smaller, Natural Resources, Mutual Shares, Discovery Shares,
Developing Markets, Greater European, Latin America, Japan, Global Bond, Global
Government and Hard Currency may enter into futures contracts on currencies. A
futures contract on currency is an agreement to buy or sell currency at a
specified price during a designated month.
These funds may also buy and sell put and call options on currency futures
contracts. A put option purchased by the fund would give it the right to assume
a position as the seller of a futures contract. A call option purchased by the
fund would give it the right to assume a position as the buyer of a futures
contract. The fund is required to pay a premium for a put or call option on a
futures contract, but is not required to take any actions under the contract. If
the option cannot be profitably exercised before it expires, the fund's loss
will be limited to the amount of the premium and any transaction costs.
Options on Foreign Currencies. AGE, Pacific Growth, Foreign Smaller, Natural
Resources, Mutual Shares, Discovery Shares, Greater European, Latin America,
Japan, Developing Markets, Global Government and Global Bond may purchase and
sell (write) put and call options on foreign currencies traded on U.S. and
foreign exchanges, or OTC. The funds will engage in such option transactions for
various hedging purposes such as to protect against declines in the U.S. dollar
value of foreign portfolio securities and against increases in the U.S. dollar
cost of foreign securities or other assets to be acquired or to hedge the value
of portfolio holdings denominated in particular currencies against fluctuations
in relative value. Hard Currency may, for hedging purposes, buy put and call
options on any currency in which the fund's investments are denominated.
Forward Currency Exchange Contracts. AGE, Mutual Shares, Discovery Shares,
Pacific Growth, Foreign Smaller, Natural Resources, Hard Currency, Global Bond,
Global Government, Greater European, German Government, Latin America, Japan,
Templeton Foreign, Smaller Companies, Developing Markets, and Gold may all, to
some degree, engage in foreign currency exchange transactions. The funds will
normally conduct foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
(Templeton Foreign and Smaller Companies may engage only in this type of forward
foreign currency exchange transaction), or through entering into forward
contracts to purchase or sell foreign securities. However, some price spread on
these transactions (to cover service charges) will be incurred when a fund
converts assets from one currency to another. When a fund is the buyer or seller
in such a transaction, it will either cover its position or maintain, in a
segregated account with its custodian bank, cash or securities having an
aggregate value equal to the amount of such commitment until payment is made.
Global Government may construct an investment position by combining a debt
security denominated in one currency with a forward contract calling for the
exchange of that currency for another currency.
Natural Resources, AGE, Global Bond, Global Government, Greater European, Latin
America and Japan have no specific limitations on the percentage of assets they
may commit to forward contracts, subject to their stated investment objectives
and policies, except that the funds will not enter into a forward contract if
the amount of assets set aside to cover forward contracts would impede portfolio
management or each fund's ability to meet redemption requests. Natural
Resources, AGE, Global Bond, Developing Markets, Greater European, Latin America
and Japan will use forward contracts primarily to protect the funds from adverse
currency movements. Developing Markets will not enter into forward currency
contracts if, as a result, the fund will have more than 20% of its total assets
committed to such contracts.
Currency Swaps. Mutual Shares and Discovery Shares may participate in currency
swaps. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them. The funds will usually enter into swaps on a net basis. The funds may
participate in currency swaps with counterparties that have received a credit
rating of A-1 from S&P or P-1 from Moody's, or are of equal credit quality.
Interest Rate Swaps. AGE and Global Government may participate in interest rate
swaps. An interest rate swap is the transfer between two counterparties of
interest rate obligations, one of which has an interest rate fixed to maturity
while the other has an interest rate that changes in accordance with changes in
a designated benchmark (e.g., London Interbank Offered Rate (LIBOR), prime,
commercial paper, or other benchmarks). AGE intends to participate in interest
rate swaps with regard to obligations held in its portfolio. To the extent AGE
does not own the underlying obligation, it will maintain, in a segregated
account with its custodian, cash or securities having an aggregate value equal
to the amount of the fund's outstanding swap obligation.
Options, futures, options on futures, forward currency exchange contracts,
interest rate swaps, currency swaps, CARs, and CMOs are considered "derivative
securities." For additional information about these investment techniques, see
the SAI. Investments in these instruments involve certain risks. For a
discussion of these risks, see "What are the Underlying Funds' Potential
Risks?" in the Appendix to this prospectus and the SAI.
Tax Considerations. The Underlying Funds' investments in options, futures,
forward contracts, foreign currencies and securities, and other complex
securities are subject to special tax rules that may affect the amount, timing
or character of the income earned by the Funds and distributed to you. These
special tax rules are discussed in the "Additional Information on Distributions
and Taxes" section of the SAI.
What are the Underlying Funds' Potential Risks?
Generally. If the securities owned by an Underlying Fund increase in value, the
value of the shares of the Underlying Fund will increase. Similarly, if the
securities owned by an Underlying Fund decrease in value, the value of the
shares of the Underlying Fund will also decline. Such increases and decreases
will be reflected in the performance of the Underlying Funds as well as the
Funds. The value of the shares of the Franklin Templeton Growth Target Fund will
tend to increase and decrease to a greater degree than those of the other Funds
due to the increased emphasis on a more aggressive Underlying Fund mix.
Similarly, the value of the shares of the Franklin Templeton Moderate Target
Fund will tend to increase and decrease to a greater degree than the shares of
the Franklin Templeton Conservative Target Fund.
Common Stocks. To the extent an Underlying Fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop in any
securities index that is based on equity securities, such as the Dow Jones
Industrials or the Standard & Poor's 500 average, may also be reflected in
declines in the Underlying Fund's share price. Historically, there have been
both increases and decreases in interest rates and in securities prices
generally and such increases and decreases may reoccur unpredictably in the
future.
Debt Securities. To the extent an Underlying Fund's investments consist of
fixed-income securities, changes in interest rates will affect the value of the
fund's portfolio and its share price; increased rates of interest which
frequently accompany higher inflation and/or a growing economy are likely to
have a negative effect on the value of shares of such Underlying Fund.
High Yielding, Fixed-Income Securities. An investment in an Underlying Fund that
has a policy of investing in higher yielding, higher risk fixed-income
securities is subject to a higher degree of risk than is present with an
investment by such fund in higher rated, lower yielding securities.
The market values of lower rated, fixed-income securities and unrated securities
of comparable quality tend to reflect individual corporate developments to a
greater extent than the market value of higher rated securities, which react
primarily to fluctuations in the general level of interest rates. Lower rated
securities also tend to be more sensitive to economic conditions than higher
rated securities. These lower-rated fixed-income securities are considered by
the rating agencies, on balance, to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and will generally involve more credit risk than
securities in the higher rating categories. Even securities rated BBB by S&P or
Baa by Moody's, ratings which are considered investment grade, possess some
speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of such issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, such issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer may be significantly greater for
the holders of high yielding securities because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. Current
prices for defaulted bonds are generally significantly lower than their purchase
price, and the fund may have unrealized losses on such defaulted securities that
are reflected in the price of the fund's shares. In general, securities which
default lose much of their value in the time period prior to the actual default
so that the net assets of a fund are impacted prior to the default. For
additional information on the risks of high yielding, fixed-income securities,
see the Appendix to this prospectus.
Foreign Securities. Investments in foreign securities involve additional risks,
not generally associated with investments in U.S. securities. These risks
include the possibility of expropriation, extraordinary taxation by the foreign
country, adverse fluctuations in foreign currencies which are not favorable
compared to the U.S. dollar, political or social instability of the countries
where the foreign issuers are located or where the exchange on which an
Underlying Fund purchased such securities is located, and/or future unfavorable
diplomatic developments between the U.S. and the foreign countries where the
issuers of the fund's foreign investments are located or where the exchanges on
which the fund purchased securities are located. There is always the possibility
of an Underlying Fund's assets being confiscated by foreign governments or
others. In addition, there may be less publicly available information about
foreign issuers and foreign companies may not be subject to auditing,
accounting, and financial reporting standards comparable to those applicable to
U.S. companies.
With respect to investments in developing markets, the small size, inexperience,
and limited volume of trading on securities markets in certain developing
countries may make a fund's investments in developing countries illiquid and
more volatile than investments in more developed countries, and the fund may be
required to establish special custody or other arrangements before making
certain investments in those countries. The economies of developing countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the countries with which they
trade. These economies also have been and may continue to be adversely affected
by economic conditions in the countries with which they trade. In many
developing markets, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers, and listed companies
than in the United States. There is an increased risk, therefore, of uninsured
loss due to lost, stolen, or counterfeit stock certificates. For additional
risks relating to investment in developing markets, please see the Appendix to
this prospectus.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the United
States. Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a fund are uninvested and no return is earned
thereon. The inability of a fund to make intended security purchases due to
settlement problems could cause the fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the fund due to subsequent declines in
value of the portfolio security or, if the fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
Options and Futures. Options and futures may fail as hedging techniques where
the price movements of the securities underlying the options and futures do not
follow the price movements of the Underlying Fund's securities which are subject
to the hedge. The loss from investing in futures transactions is potentially
unlimited. Gains and losses on investments in options and futures depend on the
investment manager's ability to predict correctly the direction of securities
markets, interest rates, and other economic factors. Also, a liquid secondary
market for any particular option or future may not be available when the
investment manager wishes to "close out" a position in an option or future. In
such case, the Underlying Fund will likely be unable to control losses by
closing its position.
Currency Transactions. Currency transactions, such as forward currency exchange
contracts, currency futures and options on such futures, options on currencies,
and currency swaps are subject to different risks than other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments. These can result in losses to a fund if it is unable to deliver
or receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
Interest Rate Swaps. Interest rate swaps are generally entered into to permit
the party seeking a floating rate obligation the opportunity to acquire such
obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed rate obligation the opportunity to
acquire such a fixed rate obligation, also frequently at a price lower than is
available in the capital markets. The success of such a transaction depends in
large part on the availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved.
Natural Resources. There are a number of risks associated with investing in the
natural resources sector, including gold. Certain commodities are subject to
limited pricing flexibility as a result of supply and demand factors. Others are
subject to broad price fluctuations, reflecting the volatility of certain raw
materials' prices and the instability of supplies of other resources. Further,
many companies operate in areas of the world where they are subject to unstable
political environments, currency fluctuations, and inflationary pressures.
Real Estate Securities. The risks associated with investing in real estate
securities include declines in the value of real estate, risks related to
general and local economic conditions, overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
casualty or condemnation losses, variations in rental income, changes in
neighborhood values, the appeal of properties to tenants, and increases in
interest rates. The value of securities of companies which service the real
estate industry also will be affected by such risks.
In addition, equity REITs will be affected by changes in the value of the
underlying property owned by the trusts, while a mortgage real estate investment
trust will be affected by the quality of the properties to which it has extended
credit. Equity and mortgage real estate investment trusts are dependent upon the
REIT's management skill, may not be diversified, and are subject to the risks of
financing projects. REITs are also subject to heavy cash flow dependency,
defaults by borrowers, self-liquidation and the possibility of failing to
qualify for tax-free pass-through of income under the Code and to maintain
exemption from the 1940 Act. By investing in REITs indirectly, a shareholder
will bear not only his proportionate share of the expenses of the fund, but
also, indirectly, similar expenses of the REITs.
Who Manages the Fund?
The Board. The Board oversees the management of the Trust and elects its
officers. The officers are responsible for the Trust's day-to-day operations.
The Board also monitors the Trust to ensure no material conflicts exist between
the two classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. Advisers
also provides asset allocation services by allocating the Fund's assets among
the Underlying Funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Advisers or other direct or indirect wholly-owned subsidiaries of Resources are
the investment managers of the Underlying Funds. Together Advisers and its
affiliates manage over $152 billion in assets. Please see "Investment Advisory,
Asset Allocation and Other Services" and "Miscellaneous Information" in the SAI
for information on securities transactions and a summary of the Trust's Code of
Ethics.
Management Team. The team responsible for the day-to-day management of each Fund
is Donald P. Gould and Seymour R. Singer.
Donald P. Gould
Portfolio Manager of Advisers and President of the Trust
Mr. Gould holds a Bachelor of Arts degree in economics from Pomona College, a
Master in Business Administration degree from the Harvard Business School, and
has studied international economics at Oxford University. Mr. Gould joined the
Franklin Templeton organization upon its acquisition of certain assets of
Huntington Advisers, Inc. in November 1993. For the eight years prior to joining
the Franklin Templeton Group, Mr. Gould was president of Huntington Funds. He
has been in the securities industry since 1981.
Seymour R. Singer
Portfolio Manager of Advisers
Mr. Singer holds a Bachelor of Arts degree in economics and psychology from the
University of California at Los Angeles and is a Chartered Financial Analyst
Level III Candidate. He has been with Advisers since 1996. Prior to joining the
Franklin Templeton Group, Mr. Singer was a portfolio analyst for The Carmack
Group, Inc. He is a member of the Association for Investment Management and
Research (AIMR) and the Los Angeles Society of Financial Analysts.
Investment Advisory and Asset Allocation Agreement. Under the investment
advisory and asset allocation agreement, Advisers provides general advisory
services. Such services include monitoring the Underlying Funds in order to
determine whether they are investing their assets in a manner that is consistent
with the asset classes targeted for investment for each Fund by Advisers.
Advisers also provides asset allocation advice and administrative services to
each Fund under the management and asset allocation agreement. While Advisers
provides general investment advisory and administrative services to each Fund
without charge, it provides asset allocation services to each Fund for a monthly
fee equivalent to an annual rate of 0.25% of the average daily net assets of
each Fund. The fee is computed at the close of business on the last business day
of each month.
During each Fund's start-up period, Advisers has agreed in advance to waive or
limit its asset allocation fee and/or make certain payments to reduce the Fund's
direct operating expenses so that each Fund's direct operating expenses do not
exceed 0.75% for Class I shares and 1.50% for Class II shares for the current
fiscal year. After July 31, 1997, Advisers may end this agreement at any time.
Each Fund, as a shareholder in the Underlying Funds, will indirectly bear its
proportionate share of any management fees and other expenses paid by the
Underlying Funds. The investment manager and the management fee of each of the
Underlying Funds are set forth below as an annual percentage rate of such Fund's
net assets:
UNDERLYING FUND MANAGER FEE RATE
- --------------------------------------------------------------------------------
Equity Advisers 0.625%1
Growth Advisers 0.625%2
Utilities Advisers 0.625%2
Small Cap Advisers 0.625%3
Value Advisers 0.750%4
Real Estate Advisers 0.625%5
Mutual Shares Franklin Mutual Advisers, Inc. 0.60%
Mutual Discovery Franklin Mutual Advisers, Inc. 0.80%
Short-Intermediate Advisers 0.625%1
Government Securities Advisers 0.625%2
Investment Grade Advisers 0.50%6
AGE Advisers 0.625%1
Templeton Foreign Templeton Global Advisors Limited ("TGAL") 0.75%7
Developing Markets Templeton Asset Management Ltd. -
Hong Kong Branch 1.25%
Smaller Companies Templeton Investment Counsel, Inc. ("TICI") 0.75%
Foreign Smaller Advisers; TICI (sub-adviser) 1.00%8,*
Greater European TGAL 0.75%
Pacific Growth Advisers; TICI (sub-adviser) 1.00%8,*
Latin America TGAL 1.25%
Japan TICI 0.75%
Hard Currency Advisers; TICI (sub-adviser) 0.65%*
Global Bond TICI 0.50%9
Global Government Advisers; TICI (sub-adviser) 0.625%1,*
German Government Advisers; TICI (sub-adviser) 0.55%*
Gold Advisers 0.625%1
Natural Resources Advisers 0.625%5
1.625% of the month end net assets of the fund up to $100 million, reduced to
.500% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million.
2.625% of the month end net assets of the fund up to $100 million, reduced to
.50% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million up to $10
billion, further reduced to .44% of such net assets in excess of $10 billion up
to $12.5 billion, further reduced to .42% of such net assets in excess of $12.5
billion up to $15 billion, further reduced to .40% of such net assets in excess
of $15 billion up to $17.5 billion, further reduced to .38% of such net assets
in excess of $17.5 billion up to $20 billion, and further reduced to .36% in
excess of $20 billion.
3.625% of the average daily net assets of the fund up to $100 million, .50% of
the average daily net assets of the fund over $100 million up to $250 million,
.45% of the average daily net assets of the fund over $250 million up to $10
billion, .44% of the average daily net assets of the fund over $10 billion up to
$12.5 billion, .42% of the average daily net assets of the fund over $12.5
billion up to $15 billion, and .40% of the average daily net assets of the fund
over $15 billion.
4.75% of average daily net assets up to $500 million, .625% of average daily net
assets over $500 million up to $1 billion, and .50% of average daily net assets
over $1 billion.
5.625% of the average daily net assets of the fund up to $100 million, .50% of
the average daily net assets of the fund over $100 million up to $250 million,
.45% of the average daily net assets of the fund over $250 million up to $10
billion, .44% of the average daily net assets of the fund over $10 billion up to
$12.5 billion, .42% of the average daily net assets of the fund over $12.5
billion up to $15 billion, and .40% of the average daily net assets of the fund
over $15 billion.
6.50% of average daily net assets up to $500 million, .45% of average daily net
assets over $500 million up to $1 billion, and .40% of average daily net assets
over $1 billion.
7.75% of the average daily net assets of the Fund up to the first $200,000,000,
reduced to a fee of .675% of such average daily net assets in excess of
$200,000,000 up to $1,300,000,000, and further reduced to a fee of .60% of such
average daily net assets in excess of $1,300,000,000.
81% of daily net assets up to $100 million, .90% of daily net assets over $100
million up to $250 million, .80% of daily net assets over $250 million up to
$500 million, and .75% of daily net assets over $500 million.
9.50% of its average daily net assets, .45% of such net assets in excess of
$200,000,000, and .40% of such net assets in excess of $1,300,000,000.
*TICI is entitled to receive from Advisers a sub-advisory fee; the sub-advisory
fees payable by Advisers have no effect on the fees payable by the Underlying
Funds to Advisers. As to Foreign Smaller and Pacific Growth, TICI receives from
Advisers a fee equal to an annual rate of the value of each fund's average daily
net assets as follows: 0.50% of such assets up to $100,000,000; 0.40% of such
assets over $100,000,000 up through $250,000,000; 0.30% of such assets over
$250,000,000 up through $500,000,000; and 0.25% of such assets over
$500,000,000. As to Hard Currency and German Government, TICI receives from
Advisers a fee equal to an annual rate of 0.25% of the value of each fund's
average daily net assets. As to Global Government, TICI receives from Advisers a
fee equal to an annual rate of the value of the fund's assets as follows: 0.35%
of such assets up to $100,000,000; 0.25% of such assets over $100,000,000 up
through $250,000,000; and 0.20% of such assets over $250,000,000.
Operating Expenses. Each Fund pays its own operating expenses. These expenses
include Advisers' fees associated with the provision of asset allocation
services; taxes, if any; custodian, legal, and auditing fees; the fees and
expenses of Board members who are not members of, affiliated with, or interested
persons of Advisers; fees of any personnel not affiliated with Advisers;
insurance premiums; trade association dues; expenses of obtaining quotations for
calculating the Fund's Net Asset Value; and printing and other expenses that are
not expressly assumed by Advisers.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, consistent with internal policies, it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
Administrative Services. FT Services provides certain administrative services
and facilities for the Fund at no charge.
The Rule 12b-1 Plans
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
How does the Fund Measure Performance?
From time to time, each class of the Fund advertises its performance. The more
commonly used measures of performance are total return, current yield, and
current distribution rate. Performance figures are usually calculated using the
maximum sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
How is the Trust Organized?
The Trust is an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust on October 2, 1995, and was
previously named Franklin Templeton Fund Manager. The Trust is registered with
the SEC under the 1940 Act. Each Fund offers two classes of shares: Franklin
Templeton Conservative Target Fund - Class I and Franklin Templeton Conservative
Target Fund - Class II, Franklin Templeton Moderate Target Fund - Class I and
Franklin Templeton Moderate Target Fund - Class II, and Franklin Templeton
Growth Target Fund - Class I and Franklin Templeton Growth Target Fund - Class
II. Additional series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. Shares of each class of a series have the same
voting and other rights and preferences as the other classes and series of the
Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
Taxes
How Do Taxes Affect the Fund?
Taxation of the Fund and the Underlying Funds' Investments
Each Fund intends to qualify for taxation as a "regulated investment company"
under the Code. By distributing all of its net investment income and capital
gains to shareholders, as well as meeting certain other requirements, each Fund
will generally not be liable for federal income or excise taxes.
Some of the Underlying Funds' investments in complex securities as described in
the section "How Do the Underlying Funds Invest Their Assets?" are subject to
special tax rules. The effect of these rules may be to accelerate income, defer
losses, convert capital gains and losses into ordinary gains and losses, and to
convert long-term capital gains and losses into short-term capital gains and
losses within the Underlying Funds. These rules may also cause the Underlying
Funds to recognize income and make distributions to the Funds prior to their
receipt of cash payments. The Underlying Funds' investments in certain foreign
securities which meet the Code definition of a Passive Foreign Investment
Company ("PFIC") may also subject the Underlying Funds to an income tax and
interest charge on their investments. In these ways, these special tax rules may
affect the amount, timing or character of the income earned by the Funds, and
distributed to you. These rules are discussed in more detail in the "Additional
Information on Distributions and Taxes" section of the SAI.
How Do Taxes Affect Your Investment?
Taxes on Distributions
Distributions from a Fund will be taxable, whether you take them in cash or
additional shares. Distributions declared in December to shareholders of record
in that month and paid in January are taxable as if they were paid on December
31.
Distributions paid from net investment income and short-term capital gain will
be taxable as ordinary dividends. Distributions paid from long-term capital gain
will be taxable as long-term capital gain, regardless of how long you have held
your shares in a Fund. Any distributions paid in excess of a Fund's earnings
will generally be treated as non-taxable returns of capital. Dividends paid from
interest earned by a Fund on its direct investments in U.S. government
obligations may be given special tax-free status on your state income tax
return, subject in some states to the Fund satisfying minimum investment
requirements.
For corporate shareholders, a portion of the dividends paid by a Fund may
qualify for the corporate dividends-received deduction. The amount so qualified
depends upon the aggregate amount of dividends received by the Underlying Funds
from domestic (U.S.) corporations, and upon other limitations which are
discussed in the "Additional Information on Distributions and Taxes" section of
the SAI.
Redemptions and Exchanges of Your Shares
If you redeem any of your shares in a Fund, or exchange your shares in the Fund
for shares of another Franklin Templeton fund, you will generally have a capital
gain or loss that must be reported on your tax return. Any loss you realize on
the redemption or exchange of your Fund 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 distributions you received on these shares.
If you exchange shares that you have held for 90 days or less for shares of
another Franklin Templeton Fund, special tax rules apply. In calculating your
gain or loss on the exchange, these rules may require you not to include as part
of your cost the sales charge you paid at the time you purchased your Fund
shares. You will, however, be permitted to add the amount of sales charge
disallowed to the cost basis of the shares you received in the exchange.
Annual Information Returns
The Funds will inform you at calendar year end of the amount and source of the
dividends and distributions paid to you.
Additional Tax Considerations
"Buying a Dividend" - If you buy shares before a dividend distribution date, you
will pay the full price for the shares and then receive a portion of the price
back in the form of a taxable distribution.
"State Taxes" - You should contact your tax advisor to determine whether state
or local income, intangible or other taxes will apply to your investment in the
Fund or to distributions or redemption proceeds you receive from the Fund. You
should also understand that because each of the Funds invests primarily in the
Underlying Funds, rather than in direct obligations of the U.S. government and
its territories, the Funds do not expect to pay dividends which qualify for
exemption from state income tax.
"Foreign Taxes" - The Underlying Funds may be subject to foreign withholding
taxes on income from their investments. The Funds will not be permitted to elect
to "pass through" to you the amount of foreign taxes paid by the Underlying
Funds on their foreign investments. Your respective share of these foreign taxes
will, therefore, be netted against your share of the Fund's other gross income
in arriving at the net investment income that the Fund distributes to you.
"Non-U.S. Investors" - You should consult with your tax advisor on potential
U.S. and non-U.S. income, estate or other taxes (including U.S. income tax
withholding) on your investment in the Fund or on dividends or distributions
paid to you by a Fund.
"Backup Withholding" - When you sign your account application, you will be asked
to supply your taxpayer identification number ("TIN"), certify that it is
correct, and certify that you are not subject to backup withholding under IRS
rules. If you fail to provide a correct TIN or the proper certifications, the
Fund will withhold 31% of its payments to you, including dividends,
distributions and redemption proceeds. The Fund will also begin backup
withholding on your account if the IRS instructs it to do so. The Fund also
reserves the right not to open your account or to redeem your shares at the
current net asset value, less any taxes withheld, if you fail to provide a
correct TIN, fail to provide the proper certifications, or the IRS advises the
Fund to begin backup withholding on your account.
The foregoing information is intended to summarize important tax rules that may
affect your investment in the Funds. See the Section entitled "Additional
Information on Distributions and Taxes" in the Statement of Additional
Information for a more complete discussion of these rules and other tax matters.
About Your Account
How Do I Buy Shares?
Opening Your Account
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
MINIMUM
INVESTMENTS*
- ------------------------------------
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
Deciding Which Class to Buy
You should consider a number of factors when deciding which class of shares to
buy. If you plan to buy $1 million or more in a single payment or you qualify to
buy Class I shares without a sales charge, you may not buy Class II shares.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds;
and
o you plan to sell a substantial number of your shares within approximately
six years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
Purchase Price of Fund Shares
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
--------------------
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Deciding Which
Class to Buy."
Sales Charge Reductions and Waivers
- - If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
Cumulative Quantity Discounts - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your investments in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
Letter of Intent - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
Group Purchases - Class I Only. If you are a member of a qualified group, you
may buy Class I 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.
Sales Charge Waivers. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases.
For waiver categories 1, 2 or 3 below: (i) the distributions or payments must be
reinvested within 365 days of their payment date, and (ii) Class II
distributions may be reinvested in either Class I or Class II shares. Class I
distributions may only be reinvested in Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1.Dividend and capital gain distributions from any Franklin Templeton Fund or a
REIT sponsored or advised by Franklin Properties, Inc.
2.Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3.Annuity payments received under either an annuity option or from death benefit
proceeds, only if the annuity contract offers as an investment option the
Franklin Valuemark Funds, the Templeton Variable Annuity Fund, the Templeton
Variable Products Series Fund, or the Franklin Government Securities Trust. You
should contact your tax advisor for information on any tax consequences that may
apply.
4.Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5.Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6.Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a thirteen 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.
7.Group annuity separate accounts offered to retirement plans
8.Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to invest
at least $500,000 in the Franklin Templeton Funds over a 13 month period.
Retirement plans that are not Qualified Retirement Plans or SEPS, such as 403(b)
or 457 plans, must also meet the requirements described under "Group Purchases -
Class I Only" above.
9.An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and suitable
for you and the effect, if any, of payments by the Fund on arbitrage rebate
calculations.
10.Broker-dealers, registered investment advisors or certified financial
planners who have entered into a supplemental agreement with Distributors for
clients participating in comprehensive fee programs.
11.Registered Securities Dealers and their affiliates, for their investment
accounts only
12.Current employees of Securities Dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
13.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
14.Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
15.Accounts managed by the Franklin Templeton Group
16.Certain unit investment trusts and their holders reinvesting distributions
from the trusts
How Do I Buy Shares in Connection with Retirement Plans?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
Other Payments to Securities Dealers
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. A Securities Dealer may only receive one of these
payments for each qualifying purchase. Securities Dealers who receive payments
under items 1, 2 or 3 below will earn the Rule 12b-1 fee associated with the
purchase starting in the thirteenth calendar month after the purchase. The
payments are paid by Distributors or one of its affiliates, at its own expense,
and not by the Fund or its shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for Class II
purchases.
2. Securities Dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up to
1% of the purchase price for Class I purchases made under waiver category 8
above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6 and 9 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
May I Exchange Shares for Shares of Another Fund?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchanging
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange by phone to
apply to your account, please let us know.
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
Will Sales Charges Apply to My Exchange?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
Contingent Deferred Sales Charge - Class I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
Contingent Deferred Sales Charge - Class II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
Exchange Restrictions
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. Please notify us in writing if you do not want this option to
be available on your account(s). Additional procedures may apply. Please
see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii) exchange
shares equal to at least $5 million, or more than 1% of the Fund's net assets.
Shares under common ownership or control are combined for these limits. If you
exchange shares as described in this paragraph, you will be considered a Market
Timer. Each exchange by a Market Timer, if accepted, will be charged $5.00. Some
of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
By Mail 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have additional requirements.
- --------------------------------------------------------------------------------
By Phone Call Shareholder Services
(Only available Telephone requests will be accepted:
if you have
completed and o If the request is $50,000 or less. Institutional
sent to us the accounts may exceed $50,000 by completing a separate
telephone redemption agreement. Call Institutional Services to receive a
agreement included copy.
with this
prospectus) o If there are no share certificates issued for the shares
you want to sell or you have already returned them to
the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 30 days
- --------------------------------------------------------------------------------
Through Your Dealer Call your investment representative.
- --------------------------------------------------------------------------------
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. Please
notify us if you do not want this option to be available on your account. If you
later decide you would like this option, send us written instructions signed by
all account owners.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
In-Kind Redemption. Each Fund will satisfy redemption requests in cash to the
fullest extent feasible, so long as such payments would not, in the opinion of
Advisers or the Board, result in the necessity of the fund selling assets under
disadvantageous conditions and to the detriment of the remaining shareholders of
the Fund. Pursuant to the Trust's Agreement and Declaration of Trust, payment
for shares redeemed may be made either in cash or in-kind, or partly in cash and
partly in-kind. Any portfolio securities paid or distributed in-kind would be
valued as described under "How are Fund Shares Valued?" in the SAI. In the event
that an in-kind distribution is made, a shareholder may incur additional
expenses, such as the payment of brokerage commissions, on the sale or other
disposition of the securities received from the Fund. In-kind payments need not
constitute a cross-section of the fund's portfolio. Where a shareholder has
requested redemption of all or a part of the shareholder's investment, and where
the Fund completes such redemption in-kind, the Fund will not recognize gain or
loss for federal tax purposes, on the securities used to complete the
redemption, but the shareholder will recognize gain or loss equal to the
difference between the fair market value of the securities received and the
shareholder's basis in the fund shares redeemed.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
Trust Company Retirement Plan Accounts
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
591/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
Contingent Deferred Sales Charge
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on shares
held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain distributions,
and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated dollar amount, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated number of shares, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
Waivers. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% a month of an account's Net Asset Value (3%
quarterly, 6% semiannually or 12% annually). For example, if you maintain
an annual balance of $1 million in Class I shares, you can withdraw up to
$120,000 annually through a systematic withdrawal plan free of charge.
Likewise, if you maintain an annual balance of $10,000 in Class II shares,
$1,200 may be withdrawn annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
What Distributions Might I Receive from the Fund?
The Fund declares dividends from its net investment income quarterly in March,
June, September and December to shareholders of record on the first business day
before the 15th of the month and pays them on or about the last day of that
month.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
Distribution Options
You may receive your distributions from the Fund in any of these ways:
1. Buy additional shares of the Fund - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both dividend
and capital gain distributions in cash.
To select one of these options, please complete sections 6 and 7 of the
shareholder application included with this prospectus or tell your investment
representative which option you prefer. If you do not select an option, we will
automatically reinvest dividend and capital gain distributions in the same class
of the Fund. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days before
the record date for us to process the new option.
Transaction Procedures and Special Requirements
How and When Shares are Priced
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
The Price We Use When You Buy or Sell Shares
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
Proper Form
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
Written Instructions
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
Signature Guarantees
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. You should
verify that the institution is an eligible guarantor before signing. A notarized
signature is not sufficient.
Share Certificates
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
Telephone Transactions
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
Trust Company Retirement Plan Accounts. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
Account Registrations and Required Documents
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
Joint Ownership. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
Gifts and Transfers to Minors. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
Trusts. You should register your account as a trust, only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
Required Documents. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
Corporation Corporate Resolution
- --------------------------------------------------------------------------------
Partnership 1. The pages from the partnership agreement that identify
the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
Trust 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
Street or Nominee Accounts. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
Electronic Instructions. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We will accept electronic instructions directly from your dealer
or representative without further inquiry. Electronic instructions may be
processed through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
Services to Help You Manage Your Account
Automatic Investment Plan
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the account application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TeleFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II of the Conservative Target Fund are 484 and 584,
Moderate Target Fund are 485 and 585 and Growth Target Fund are 486 and 586.
Statements and Reports to Shareholders
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. Please
verify the accuracy of your statements when you receive them.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household
and send only one copy of a report. Call Fund Information if you would like
an additional free copy of the Fund's financial reports or an interim
quarterly report.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
Availability of These Services
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
What If I Have Questions About My Account?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
Glossary
Useful Terms and Definitions
1933 Act - Securities Act of 1933, as amended
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - Each Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
Contingent Deferred Sales Charge (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
Fitch - Fitch Investors Services, Inc.
Franklin Funds - The mutual funds in the Franklin Group of Funds except Franklin
Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
Moody's - Moody's Investors Service, Inc.
Mutual Series - Franklin Mutual Series Fund, Inc., a member of the Franklin
Group of Funds, formerly the Mutual Series Fund Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
Qualified Retirement Plan(s) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing, and defined benefit plans.
REIT - Real Estate Investment Trust
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TeleFACTS(R) - Franklin Templeton's automated customer servicing system
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
Appendices
What are some of the Other Investment Policies and Strategies of, and Risks of
an Investment in, the Underlying Funds?
Borrowing. As a fundamental investment restriction, each of the Underlying Funds
(except Value, Mutual Shares, Discovery Shares, Developing Markets, Global Bond,
Greater European, Latin America and Japan) may not borrow money except for
temporary or emergency purposes. These Underlying Funds may borrow for such
purposes up to the amounts indicated: Equity, Growth, Utilities,
Short-Intermediate, Government Securities, AGE, Gold - 5% of total assets;
Smaller Companies and Templeton Foreign - 5% of total assets for purposes of
redeeming their shares for cancellation; Small Cap, Real Estate, Pacific Growth,
Foreign Smaller - 10% of total assets; Investment Grade - 15% of total assets;
Global Government - 30% of total assets; Natural Resources - 33% of total
assets; and German Government and Hard Currency - 331/3% of total assets.
As a fundamental investment restriction, Value, Developing Markets, Greater
European, Latin America and Japan may borrow money in an amount not exceeding
331/3% of their net assets; Global Bond may borrow money in an amount not
exceeding 30% of its assets (however, the fund's board of trustees has adopted a
policy of limiting the fund's borrowing to 5% of its net assets to increase
holdings of portfolio securities); and Mutual Shares and Discovery Shares may
borrow up to 331/3% of their assets (plus 5% for emergency or short-term
purposes).
Brady Bonds. Brady Bonds involve various risk factors including residual risk
and the history of defaults with respect to commercial bank loans by public and
private entities of Brady Countries. There can be no assurance that Brady Bonds
in which Latin America may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the fund to suffer a
loss of interest or principal on any of its holdings.
Convertible Securities, including Enhanced and Synthetic Convertible Securities.
Because convertible securities have features of both common stocks and debt
securities, their value can be influenced by both interest rate and market
movements. As with a debt security, a convertible security tends to increase in
value when interest rates decline and decrease in value when interest rates
rise. The price of a convertible security is also influenced by the market value
of the underlying common stock. Thus, its price tends to increase as the value
of the underlying stock rises and decrease as the value of the underlying stock
declines. In addition, because its value can be influenced by both interest rate
and market movements, a convertible security is not as sensitive to interest
rates as a similar fixed-income security, nor is it as sensitive to changes in
share price as its underlying stock.
Enhanced Convertible Securities. Pacific Growth, Foreign Smaller, Gold, Equity,
Growth, Utilities, Value, and Real Estate may invest in convertible preferred
stocks that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stocks ("PERCS"), which provide an investor with the opportunity to
earn higher dividend income than is available on a company's common stock. PERCS
are preferred stocks that generally feature a mandatory conversion date, as well
as a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
These funds may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which these funds may invest, consistent with their
objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Underlying Funds. The fund may have difficulty
disposing of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the Underlying Fund's ability to dispose of
particular securities, when necessary, to meet the fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the credit
worthiness of an issuer. Reduced liquidity in the secondary market for certain
securities may also make it more difficult for the Underlying Fund to obtain
market quotations based on actual trades for purposes of valuing the fund's
portfolio.
Synthetic Convertibles. Value, Pacific Growth and Foreign Smaller may invest in
synthetic convertible securities. A synthetic convertible is created by
combining distinct securities, which together have the two principal
characteristics of a true convertible security: fixed income and the right to
acquire the underlying equity security. This combination is achieved by
investing in both nonconvertible fixed-income securities and in either warrants,
stock options, or stock index call options that grant the holder the right to
purchase a specified quantity of securities within a specified period of time at
a specified price or, in the case of stock index options, the right to receive
cash.
Synthetic convertible securities differ from true convertible securities in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the investment manager
normally expects to create synthetic convertibles whose two components represent
one issuer, the character of a synthetic convertible allows the fund to combine
components representing distinct issuers, or to combine a fixed-income security
with a call option on a stock index, when the investment manager determines that
such a combination would better promote the fund's investment objective. In
addition, the component parts of a synthetic convertible security may be
purchased simultaneously or separately, and the holder of a synthetic
convertible faces the risk that the price of the stock, or the level of the
market index underlying the convertibility component will decline.
Currency Fluctuations. Because certain of the Underlying Funds under normal
circumstances will invest a substantial portion of their total assets in the
securities of foreign issuers that are denominated in foreign currencies, the
strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the fund's investment performance. A decline in the value of
any particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of the fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the fund's Net Asset Value and
any net investment income and capital gains to be distributed by the fund in
U.S. dollars.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the U.S.,
and other economic and financial conditions affecting the world economy.
Although the Underlying Funds value their assets daily in terms of U.S. dollars,
the funds do not intend to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. Certain funds may do so from time to time.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to the fund at one rate, while offering a lesser rate
of exchange should the fund desire to sell that currency to the dealer.
Depositary Receipts. Many securities of foreign issuers are represented by ADRs,
EDRs, and GDRs (collectively, "Depositary Receipts"). ADRs evidence ownership
of, and represent the right to receive, securities of foreign issuers deposited
in a domestic bank or trust company or a foreign correspondent bank. EDRs and
GDRs are typically issued by foreign banks or trust companies, although they
also may be issued by U.S. banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a U.S. corporation.
Generally, Depositary Receipts in registered form are designed for use in the
U.S. securities market and Depositary Receipts in bearer form are designed for
use in securities markets outside the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than directly
in the stock of foreign issuers, an Underlying Fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there is
a large, liquid market in the U.S. for ADRs quoted on a national securities
exchange or on NASDAQ. The information available for ADRs is subject to the
accounting, auditing, and financial reporting standards of the U.S. market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers may be subject. EDRs and GDRs
may not necessarily be denominated in the same currency as the underlying
securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between such information and the market value of the Depositary Receipts.
Depositary Receipts reduce but do not eliminate all the risk inherent in
investing in the securities of foreign issuers. To the extent that an Underlying
Fund acquires Depositary Receipts through banks which do not have a contractual
relationship with the foreign issuer of the security underlying the Depositary
Receipt to issue and service such Depositary Receipts, there may be an increased
possibility that the fund would not become aware of and be able to respond to
corporate actions such as stock splits or rights offerings involving the foreign
issuer in a timely manner.
Developing or Emerging Market Countries. Investments in companies domiciled in
developing countries may be subject to potentially higher risks than investments
in developed countries. These risks include (i) less social, political, and
economic stability; (ii) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which results
in a lack of liquidity and in greater price volatility; (iii) certain national
policies which may restrict a fund's investment opportunities, including
restrictions on investment in issuers or industries deemed sensitive to national
interests; (iv) foreign taxation; (v) the absence of developed structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (vi) the absence, until recently in certain Eastern
European countries, of capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events in
such countries.
In addition, some developing market countries have experienced substantial, and
in some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. Moreover,
the economies of some developing countries may differ favorably or unfavorably
from the United States economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency, and balance of payments position.
To the extent of the Communist Party's influence, investments in such countries
may involve risks of nationalization, expropriation and confiscatory taxation.
The communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of such expropriation, a fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in Eastern European countries. Finally,
even though certain Eastern European currencies may be convertible into U.S.
dollars, the conversion rates may be artificial to the actual market values and
may be adverse to an Underlying Fund and its shareholders.
There are further risks specific to investments in Eastern Europe, including
Russia, and/or Latin America, for a further discussion of these risks, please
see the SAI.
Equipment Related Instruments. Global Government may purchase equipment trust
certificates, equipment lease certificates, and conditional sales contracts.
Equipment related instruments are used to finance the acquisition of new
equipment. The instrument gives the bondholder the first right to the equipment
in the event that interest and principal are not paid when due. Title to the
equipment is held in the name of the trustee, usually a bank, until the
instrument is paid off. Equipment related instruments usually mature over a
period of 10 to 15 years. In practical effect, equipment trust certificates,
equipment lease certificates and conditional sales contracts are substantially
identical; they differ mainly in legal structure. These fixed-income securities
may involve equity features, such as conversion or exchange rights or warrants
for the acquisition of stock of the same or a different issuer; participation
based on revenues, sales or profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common stock are offered as a
unit).
German Government Bonds. The primary risk factors associated with investment in
German government obligations arise in connection with market fluctuations in
the level of German interest rates and in the exchange rate between the U.S.
dollar and the German mark. At any given point in time, the impact of interest
rate and currency exchange rate changes on German Government's Net Asset Value
may be reinforcing or offsetting.
The yield and total return of German Government may be higher or lower than the
yield and total return of a fund investing in U.S. dollar-denominated bonds of
comparable maturity and quality. In addition, due to periodic interest rate and
exchange rate volatility, the fund's Net Asset Value is likely to experience
significant volatility from time to time, and this volatility may be greater
than would be experienced by a comparable U.S. dollar-denominated bond fund.
Because of its investment primarily in German mark-denominated obligations and
its policy of not hedging currency risk, German Government's Net Asset Value
will likely exhibit greater day-to-day volatility than a fund that diversifies
its currency risk across multiple currencies and/or regularly hedges its
currency risk. Even though interest rates on German government obligations may
from time to time exceed the rates on U.S. dollar-denominated bonds of
comparable maturity and quality, a decline in the German mark relative to the
U.S. dollar over any given period could more than offset any interest rate
advantage, resulting in a negative total return for German Government over that
period.
German interest rates and currency valuations have fluctuated unpredictably in
the past and can be expected to do so in the future.
The following information is a brief summary of factors affecting German
Government and does not purport to be a complete description of such factors.
The information is based primarily upon information derived from public
documents relating to securities offerings of issuers of German government
obligations, from independent credit reports and historically reliable sources,
but has not been independently verified by German Government, the Underlying
Funds or the Funds.
The Federal Republic of Germany, which comprises what was formerly the nations
of East Germany and West Germany, is considered by the rating agencies and by
the fund's investment managers to be among the world's most creditworthy issuers
of debt obligations. Both S&P and Moody's have assigned their highest ratings
(AAA/Aaa) to obliga-tions of the Federal Republic of Germany.
The German mark is considered to be the primary reserve currency of Europe and,
along with the Japanese yen, has increasingly been used as a reserve currency
worldwide, sharing the traditional role of the U.S. dollar. Because of Germany's
strong record of economic growth and responsible fiscal and monetary policy, the
mark has been among the strongest of the world's major currencies in the period
dating back to the return of freely floating exchange rates in the early 1970s.
Of course, there can be no assurance that the German mark will perform or be
regarded in the future as it has in the past.
The Bundesbank (the German central bank) operates largely independently of
Germany's political system and is charged with responsibility for protecting the
international value of the German mark. In response to the high levels of
unification-related public and private expenditures and the inflationary
pressures arising from these expenditures, the Bundesbank has maintained a tight
monetary policy in recent years, resulting in interest rates well above those in
the U.S., Japan and other countries outside Europe. In mid-1992, German interest
rates began to decline as continued tight monetary policy created expectations
of economic slowing. This decline in German rates continued through the end of
1993 as the German economy suffered a significant recession and the Bundesbank
accelerated the easing process. During the first quarter of 1994, German yields
began to rise as signs of economic growth emerged in the German economy.
The unification of East Germany and West Germany and the ensuing efforts to
raise living standards and modernize infrastructure in what was previously East
Germany have been a costly undertaking for Germany. Much of the cost of
unification has been financed through deficit spending, resulting in
significantly increased public-sector borrowing requirements since 1989. The
ongoing high levels of public sector borrowing and spending in Germany resulting
from unification may cause German interest rates and inflation rates to be
higher than would otherwise be the case. This, in turn, may adversely affect the
total returns on German government obligations. Unification has placed great
pressure on the German economy and, although progress has recently been made to
improve German government finances, these pressures may adversely affect
monetary policy as conducted by the Bundesbank as well as the credit quality of
German government obligations.
In addition to unification, the disintegration of the Soviet Union and its
sphere of influence also may have an adverse impact on the German economy. In
particular, Germany may be subject to increased immigration pressures and social
discord. Germany also faces uncertainty with respect to repayment of
government-guaranteed loans made to former eastern bloc countries.
GNMAs. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, however,
it is more likely that mortgages contained in GNMA pools will be prepaid, thus
reducing the effective yield. This potential for prepayment during periods of
declining interest rates may reduce the general upward price increases of GNMAs
as compared to the increases experienced by non-callable debt securities over
the same periods. Moreover, any premium paid on the purchase of a GNMA will be
lost if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by a fund will have a direct impact on the Net Asset Value per
share of the fund.
High Yielding, Fixed-Income Securities. High yielding, fixed-income securities
frequently have call or buy-back features that permit an issuer to call or
repurchase the securities from a fund. Although such securities are typically
not callable for a period from three to five years after their issuance, if a
call were exercised by the issuer during periods of declining interest rates,
the fund's investment manager may find it necessary to replace the securities
with lower yielding securities which could result in less investment income to
the fund. The premature disposition of a high yielding security due to a call or
buy-back feature, the deterioration of the issuer's creditworthiness, or a
default may also make it more difficult for the fund to manage the timing of its
receipt of income, which may have tax implications.
A fund may have difficulty disposing of certain high yielding securities because
there may be a thin trading market for a particular security at any given time.
The market for lower rated, fixed-income securities generally tends to be
concentrated among a smaller number of dealers than is the case for securities
that trade in a broader secondary retail market. Generally, purchasers of these
securities are predominantly dealers and other institutional buyers, rather than
individuals. To the extent the secondary trading market for a particular high
yielding, fixed-income security does exist, it is generally not as liquid as the
secondary market for higher rated securities. Reduced liquidity in the secondary
market may have an adverse impact on market price and a fund's ability to
dispose of particular issues, when necessary, to meet the fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for a fund to obtain market
quotations based on actual trades for purposes of valuing the fund's portfolio.
Current values for these high yield issues are obtained from pricing services
and/or a limited number of dealers and may be based upon factors other than
actual sales.
Equity, Gold, Natural Resources, Small Cap, Real Estate, Value, AGE, Foreign
Smaller and Global Government are authorized to acquire high yielding,
fixed-income securities that are sold without registration under the federal
securities laws and therefore carry restrictions on resale. While many high
yielding securities have been sold with registration rights, covenants, and
penalty provisions for delayed registration, if a fund is required to sell
restricted securities before the securities have been registered, it may be
deemed an underwriter of the securities under the 1933 Act, which entails
special responsibilities and liabilities. A fund may incur special costs in
disposing of such securities; however, the fund will generally incur no costs
when the issuer is responsible for registering the securities.
Equity, Gold, Natural Resources, Small Cap, Real Estate, Value, AGE, Foreign
Smaller and Global Government may acquire high yielding, fixed-income securities
during an initial underwriting. These securities involve special risks because
they are new issues. The investment manager for these funds will carefully
review their credit and other characteristics. The funds have no arrangement
with their underwriters or any other person concerning the acquisition of these
securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of such securities to
meet their obligations. Although the economy has improved considerably and high
yielding securities have performed more consistently since that time, there is
no assurance that the adverse effects previously experienced will not reoccur.
For example, the highly publicized defaults of some high yield issuers during
1989 and 1990 and concerns regarding a sluggish economy which continued into
1993 depressed the prices for many of these securities. While market prices may
be temporarily depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities will
adversely impact an Underlying Fund's Net Asset Value. In addition, a fund may
incur additional expenses to the extent it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
Illiquid Securities. An illiquid security is a security that cannot be sold
within seven days in the normal course of business for approximately the amount
at which the fund has valued the security. Equity, Growth, Utilities, Small Cap,
Value, Real Estate, Short-Intermediate, Government Securities, Investment Grade,
AGE, Hard Currency, Developing Markets, Templeton Foreign, Smaller Companies,
Global Bond, Global Government, Pacific Growth, Foreign Smaller, German
Government and Gold may not purchase an illiquid security if, at the time of
purchase, the fund would have more than 10% of its total net assets invested in
such securities. Pacific Growth and Foreign Smaller intend to limit such
investments to 5% of their respective net assets. Natural Resources, Mutual
Shares, Discovery Shares, Greater European, Latin America and Japan may invest
up to 15% of their respective total assets in illiquid securities.
Investment Company Securities. Certain of the Underlying Funds may invest in
other investment companies to the extent permitted by the 1940 Act and
exemptions thereto. To the extent that a fund invests in an investment company,
there may be duplication of advisory and other fees.
Japanese Issuers. Like other stock markets, the Japanese stock market can be
volatile. For example, the Japanese stock market, as measured by the Nikkei
Stock Average, increased by over 500% during the ten-year period ended December
31, 1989, reaching its high of 38,915.87 on December 18, 1989, and it has
declined by over 50% since that time, falling to 16,505.67 on June 13, 1995.
This decline has had an adverse effect on the availability of credit and on the
value of the substantial stock holdings of Japanese companies, in particular,
Japanese banks, insurance companies and other financial institutions. This in
turn has contributed to the recent weakness in Japan's economy. A continuance or
recurrence of a Japanese stock market decline could have an adverse impact
throughout Japan's economy.
Japan has had problems with certain of its trading partners, particularly the
United States, to whom it sells significantly more than it buys in return. Even
the dramatic appreciation of the yen relative to the dollar from (Y) 239 to
approximately (Y) 87 per dollar between September 1985 and July 1995 has not
altered the trade imbalance with the United States. However, Japan is taking
steps to stimulate domestic demand through tax deductions, increased spending on
construction and redevelopment, and easing of the discount rate. Efforts are
underway, in particular, to open up Japanese markets to more U.S. products.
Internally, certain commentators have pointed to Japan's rapidly aging
population, an outdated retail and distribution system, a rigid education
system, and a decrease in the work ethic among Japanese youth as potential
sources of future economic difficulties. Three substantial economic stimulus
programs were put into place in 1993, and in 1994 a personal income tax cut of
considerable magnitude was announced. Additionally, private companies are
successfully making a global diversification of their production facilities to
cope with the yen appreciation against the U.S. dollar.
The common stocks of many Japanese companies continue to trade at high
price-earnings ratios even after the recent market decline. Differences in
accounting methods make it difficult to compare the earnings of Japanese
companies with those of companies in other countries, especially the United
States. In general, however, reported net income in Japan is understated
relative to U.S. accounting standards and this is one reason why price-earnings
ratios of the stocks of Japanese companies have tended historically to be higher
than those for U.S. stocks. In addition, Japanese companies have tended
historically to have higher growth rates than U.S. companies and Japanese
interest rates have generally been lower than in the U.S., both of which factors
tend to result in lower discount rates and higher price-earnings ratios in Japan
than in the United States.
There are further risks specific to investments in Japan, for a further
discussion of these risks, please see the SAI.
Loan Participations. AGE, Value, Mutual Shares, Discovery Shares and Global
Government are authorized to acquire loan participations in which the funds will
purchase from a lender a portion of a larger loan which it has made to a
borrower. Generally, such loan participations are sold without guarantee or
recourse to the lending institution and are subject to the credit risks of both
the borrower and the lending institution. Such loan participations, however, may
enable the fund to acquire an interest in a loan from a financially strong
borrower which it could not do directly. While loan participations generally
trade at par value, the funds will be permitted to purchase such securities
which sell at a discount because of the borrower's credit problems. To the
extent the borrower's credit problems are resolved, such loan participations may
appreciate in value. Loan participations carry substantially the same risks as
those for defaulted debt obligations and may cause loss of the entire
investment. AGE's investment in loan participations, some of which may be in
default, and other defaulted securities will represent no more than 15% of the
fund's net assets at the time of investment, subject to AGE's policy concerning
illiquid securities to the extent that certain participations are considered to
be illiquid. With respect to Value, Mutual Shares, and Discovery Shares, loan
participations will be included in the funds' limitation on illiquid securities.
Loans of Portfolio Securities. Equity, Growth, Utilities, Small Cap, Value,
Natural Resources, Real Estate, Short-Intermediate, Investment Grade, AGE,
Mutual Shares, Discovery Shares, Greater European, Developing Markets, German
Government, Latin America, Japan, Hard Currency, Global Bond, Pacific Growth,
Foreign Smaller and Gold may lend securities they have purchased to certain
securities dealers or other institutional investors, so long as the total amount
of the loans does not exceed 10% of the value of each of Short-Intermediate's,
Equity's, Growth's, Real Estate's, Utilities', AGE's, and Gold's total assets,
20% of Small Cap's total assets, 25% of Value's total assets, 30% of Investment
Grade's, Global Government's, German Government's and Hard Currency's total
assets, 33% of Natural Resources' total assets and, 331/3% of Greater
European's, Pacific Growth's, Foreign Smaller's, Latin America's, Japan's,
Global Bond's, and Developing Markets' total assets. Investment Grade, Mutual
Shares, and Discovery Shares intend to limit such borrowing to 5% of their
respective total assets.
In connection with such loans, the borrower must deposit with the fund's
custodian bank collateral with an initial value of at least 100% of the initial
value of the securities loaned, including any earned but unpaid interest. The
value of the collateral and loaned securities is determined daily so that the
fund has collateral for at least 100% (102% in the case of Short-Intermediate
and Global Government) of the value of the loaned securities. The collateral
must consist of cash, securities issued by the U.S. government, its agencies or
instrumentalities, or irrevocable letters of credit. The funds loan securities
with the primary goal of increasing their income. This is accomplished either
through investing the cash collateral received in short-term interest bearing
fixed-income securities, or by receiving a payment from the borrower called a
loan premium. When the funds loan their securities, they continue to be entitled
to all dividends or interest on those securities.
Developing Markets, Greater European, Latin America and Japan retain the right
to terminate their loans at any time and obtain the return of the securities
loaned within five business days.
In connection with securities loans, as with any extension of credit, there are
risks of delay in recovery of the collateral or loss of rights in the collateral
if the borrower fails financially.
Mortgage-backed Securities (including CMOs) and Asset-backed Securities
(including CARs). Mortgage-backed and asset-backed securities are often subject
to more rapid repayment than their stated maturity dates would indicate because
of the pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying
mortgage-backed and asset-backed securities can be expected to accelerate, and
thus impair a fund's ability to reinvest the returns of principal at comparable
yields. Accordingly, the market values of these securities will vary with
changes in market interest rates generally and in yield differentials among
various kinds of U.S. government securities and other mortgage-backed and
asset-backed securities. The market value of mortgage-backed securities will
generally decline when interest rates rise and rise when interest rates decline.
However, mortgage-backed securities may have less potential for capital
appreciation than other investments of comparable maturities due to the
likelihood of increased prepayments of mortgages as interest rates decline. In
addition, to the extent such securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of a
fund's principal investment to the extent of the premium paid.
Asset-backed securities present certain additional risks that are not presented
by mortgage-backed securities because asset-backed securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities. CARs are asset-backed securities. In the case of automobile
receivables, there is a risk that the holders of these receivables may not have
either a proper or first security interest in all of the obligations backing the
receivables due to the large number of vehicles involved in a typical issuance
and technical requirements under state law. Therefore, recoveries on repossessed
collateral may not always be available to support payments on the securities.
New or Unseasoned Companies. Certain Underlying Funds may invest in the
securities of relatively new or unseasoned companies which are in their early
stages of development or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These companies may have relatively small revenues, limited product
lines, and a small share of the market for their products or services. Small
companies may lack depth of management and may be unable to generate the funds
necessary for growth or potential development. In addition, these companies may
be developing or marketing new products and services for which markets are not
yet or may never become established. As a result, small companies may suffer
significant losses as well as realize substantial growth, and investments in
such companies tend to be volatile and, therefore, speculative.
Non-diversification. As non-diversified investment companies under the 1940 Act,
Value, Natural Resources, Real Estate, Global Bond, German Government, Hard
Currency and Global Government may concentrate their investments in the
securities of a smaller number of issuers than if they were diversified
companies. An investment in a non-diversified fund entails greater risk than an
investment in a diversified investment company because a higher percentage of
investments among fewer issuers may result in greater fluctuation in the total
market value of the fund's portfolio, and economic, political, or regulatory
developments may have a greater impact on the value of the fund's portfolio than
would be the case if the portfolio were diversified among more issuers.
Public Utilities Securities. The risks of investments in the Public Utilities
Industry include: risks associated with regulatory changes; risks associated
with interest rate fluctuations; the difficulty of obtaining adequate returns on
invested capital in spite of frequent rate increases; the difficulty of
financing large construction programs during inflationary periods; restrictions
on operations and increased costs and delays attributable to environmental
considerations; difficulties of the capital markets in absorbing utility debts
and equity securities; difficulties in obtaining fuel for electric generation at
reasonable prices; risks associated with the operation of nuclear power plants;
and general effects of energy conservation.
REITs and other Real Estate-Related Investments. Equity, Developing Markets,
AGE, Small Cap, Natural Resources, Smaller Companies, Foreign, Greater European,
Pacific Growth, Foreign Smaller, Global Bond, Real Estate, Latin America and
Japan may invest in entities which qualify as REITs for federal income tax
purposes or in other marketable securities secured by real estate or interests
therein. In order to qualify as a REIT, a company must invest primarily in real
estate-related investments, and distribute virtually all of its taxable income
to shareholders. Equity does not intend to invest more than 10% of its total
assets in REITs. AGE, Natural Resources and Developing Markets will not invest
more than 10% of their assets in REITs.
REIT investments are subject to risks common to all real estate investing,
namely declines in the value of real estate, changes in general and local
economic conditions, overbuilding and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, variations in rental income, changes in neighborhood
values, the appeal of properties to tenants, and increases in interest rates.
REITs are also subject to a number of risks directly related to their
operations. For example, the success of a REIT depends upon large inflows of
cash flowing from the underlying real estate investments. REITs are also subject
to the possibility of failing to qualify for tax-free pass-through of income
under the Code and to maintain exemption from the federal securities law
registration requirements.
Repurchase Agreements. Each Fund and Underlying Fund except Government
Securities may engage in repurchase agreement transactions. In a repurchase
agreement transaction, the fund purchases a U.S. government security from a bank
or broker-dealer. The agreement provides that the security must be sold back to
the bank or broker-dealer at an agreed-upon price and date. The bank or
broker-dealer must transfer to the fund's custodian securities with an initial
value, including any earned but unpaid interest, equal to at least 102% of the
dollar amount invested by the fund in each repurchase agreement as collateral.
The value of the underlying U.S. government security is determined daily so that
the fund has collateral of at least 100% of the value of the repurchase
agreement. A repurchase agreement is considered to be a loan by the fund under
the federal securities laws which regulate mutual funds.
In a repurchase agreement transaction, a default or insolvency by the bank or
broker-dealer might cause a loss or delay in liquidating the collateral securing
the repurchase agreement. A Fund or Underlying Fund might also incur costs in
liquidating the collateral. The Funds and Underlying Funds, however, intend to
enter into repurchase agreements only with financial institutions such as banks
and broker-dealers which are considered to be creditworthy by the fund's
investment manager.
Restricted Securities. Certain of the Underlying Funds may invest a specific
percentage of their total assets in restricted securities. Restricted securities
involve certain risks, including the risk that a secondary market may not exist
when a holder wants to sell them. In addition, the price and valuation of these
securities may reflect a discount because they are perceived as having less
liquidity than the same securities that are not restricted. If a fund suddenly
has to sell restricted securities, time constraints or lack of interested,
qualified buyers may prevent the fund from receiving the value at which the
securities are carried on the books of the fund at the time of the sale.
Alternatively, the investment manager may sell unrestricted securities it might
have retained if the fund had only held unrestricted securities.
Reverse Repurchase Agreements. Small Cap, Global Government and Natural
Resources may enter into reverse repurchase agreements. These agreements involve
the sale of securities held by the funds pursuant to an agreement to repurchase
the securities at an agreed-upon price, date, and interest payment. When
entering into reverse repurchase transactions, cash or securities of a dollar
amount equal in value to the funds' obligation under the agreement, including
any earned but unpaid interest, will be maintained in a segregated account with
each fund's respective custodian bank. The value of the securities subject to
the reverse repurchase agreement will be determined daily.
Reverse repurchase agreement transactions involve the risk that the market value
of the securities sold by the fund may decline below the repurchase price of the
securities subject to the agreement and the risk that a default by the purchaser
may cause the fund to experience a loss.
Short Sales. Value may make short sales and short sales "against the box" up to
25% of its net assets. At any time, it will not have more than 15% of the value
of its net assets in deposits or short sales "against the box." Global
Government may make short sales "against the box," provided that it will not
have more than 10% of its Net Asset Value held as collateral for such short
sales. Mutual Shares and Discovery Shares may make short sales up to 5% of their
respective total net assets, and may sell securities "short against the box"
without limit. Short sales are transactions in which the fund sells a security
it does not own in anticipation of a decline in the market value of that
security. In a short sale "against the box," the fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
Small Capitalization Stocks. Small capitalization stocks have historically been
more volatile in price than the larger capitalization stocks. Among the reasons
for the greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
such stocks, and the greater sensitivity of small companies to changing economic
conditions. Small company stocks also may, to a degree, fluctuate independently
of larger company stocks. Small company stocks may decline in price as large
company stocks rise, or rise in price as large company stocks decline. Small
capitalization stocks may have many of the characteristics of securities of new
or unseasoned companies as described above.
Standby Commitment Agreements. Natural Resources may from time to time enter
into standby commitment agreements. Such agreements commit the fund, for a
stated period of time, to purchase a stated amount of a security which may be
issued and sold to the fund at the option of the issuer. The price and coupon of
the security is fixed at the time of the commitment. At the time of entering
into the agreement, the fund is paid a commitment fee, regardless of whether the
security is ultimately issued, which is typically approximately 0.5% of the
aggregate purchase price of the security which the fund has committed to
purchase. The fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and/or price
which is considered advantageous to the fund. The fund will not enter into a
standby commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 15% of its
net assets, taken at the time of acquisition of such commitment or security. The
fund will at all times maintain a segregated account with its custodian bank of
cash, cash equivalents, U.S. government securities or other securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund may bear the
risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the fund's Net Asset Value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Structured Investments. Templeton Foreign, Smaller Companies, Global Bond,
Developing Markets, Greater European and Latin America may invest in structured
investments. Structured investments involve entities organized and operated
solely for the purpose of restructuring the investment characteristics of
various securities. These entities are typically organized by investment banking
firms which receive fees in connection with establishing each entity and
arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Investments") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Investments to
create securities with different characteristics such as varying maturities,
payment priorities or interest rate provisions; the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash
flow on the underlying instruments.
Structured Investments may be of a class that is subordinated or unsubordinated
to the right of payment of another class. Subordinated Structured Investments
typically have higher yields and present greater risks than unsubordinated
Structured Investments. Structured Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Investments. To the extent such investments are illiquid, they will
be subject to a fund's restriction on investments in illiquid securities.
Temporary Investments.Several of the Underlying Funds have an express policy
regarding temporary cash investments. Under certain circumstances, including in
anticipation of and during temporary defensive periods, for liquidity purposes
and to meet redemption requests, these Underlying Funds may invest in a variety
of securities (some of the funds without limit). The types of securities in
which the funds may invest for these purposes may include bonds and other debt
obligations of companies of various nations throughout the world, debt
obligations of the U.S. government or its political subdivisions (including
obligations issued or guaranteed by U.S. government agencies or
instrumentalities), debt obligations of other governments, bank obligations
(certificates of deposit, letters of credit and bankers' acceptances or
instruments secured by these obligations), time deposits, commercial paper,
repurchase agreements, money market securities denominated in U.S. dollars or in
the currency of any foreign country, and shares of affiliated money market
funds. Certain Underlying Funds may also invest temporarily in high risk, lower
quality debt obligations.
Trade Claims. AGE, Value, Mutual Shares, and Discovery Shares may invest a
portion of their assets in trade claims. Trade claims are purchased from
creditors of companies in financial difficulty. For purchasers such as these
funds, trade claims offer the potential for profits since they are often
purchased at a significantly discounted value and, consequently, may generate
capital appreciation in the event that the value of the claim increases as the
debtor's financial position improves. In the event that the debtor is able to
pay the full obligation on the face of the claim as a result of a restructuring
or an improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price. AGE's investment in these
instruments will not exceed, and Value intends to limit these investments to no
more than, 5% of their respective net assets at the time of purchase. Trade
claims are generally liquid as there is a secondary market, but the boards of
the funds will monitor their liquidity.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trading in claims is not regulated by federal
securities laws or the SEC. Currently, trading in claims is regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade claims
may have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding.
U.S. Treasury Rolls. Investment Grade may enter into "U.S. Treasury rolls" in
which the fund sells outstanding U.S. Treasury securities and buys back
"when-issued" U.S. Treasury securities of slightly longer maturity for
simultaneous settlement on the settlement date of the "when-issued" U.S.
Treasury security. During the period prior to settlement date, the fund
continues to earn interest on the securities it is selling. It does not earn
interest on the securities that it is purchasing until after settlement date.
With respect to these transactions, Investment Grade could suffer an opportunity
loss if the counterparty to the roll failed to perform its obligations on
settlement date, and if market conditions changed adversely. The fund intends,
however, to enter into U.S. Treasury rolls only with government securities
dealers recognized by the Federal Reserve Board or with member banks of the
Federal Reserve System.
Value Investing. Value will invest principally in the securities of companies
believed by the investment manager to be undervalued. Securities of a company
may be undervalued as a result of overreaction by investors to unfavorable news
about a company, industry, the stock market in general, or as a result of a
market decline, poor economic conditions, tax-loss selling or actual or
anticipated unfavorable developments affecting a company. Often these companies
are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which Value may invest tend to increase in value more quickly
during economic upturns than noncyclical stocks, but they also tend to lose
value more quickly in economic downturns. As with all investments, there is
always the possibility when investing in these securities that the investment
manager may be incorrect in its assessment of a particular industry or company
or that the investment manager may not purchase these securities at their lowest
possible prices or sell them at their highest.
Value's purchase of securities of companies emerging from bankruptcy may present
risks that do not exist with other investments. Companies emerging from
bankruptcy may have some difficulty retaining customers and suppliers who prefer
transacting with solvent organizations. If new management is installed in a
company emerging from bankruptcy, the management may be considered untested; if
the existing management is retained, the management may be considered
incompetent. Further, even when a company has emerged from bankruptcy with a
lower level of debt, it may still retain a relatively weak balance sheet. During
economic downturns these companies may not have sufficient cash flow to pay
their debt obligations and may also have difficulty finding additional
financing. In addition, reduced liquidity in the secondary market may make it
difficult for the fund to sell the securities or to value them based on actual
trades.
Value's policy of investing in securities that may be out of favor, including
turnarounds, cyclicals, and companies emerging from bankruptcy, companies
reporting poor earnings, and companies whose share prices have declined sharply
or which are not widely followed, differs from the approach followed by many
other mutual funds. The investment manager believes, however, that these
securities may provide a greater total investment return than securities whose
prices appear to reflect anticipated favorable developments.
When-Issued, Delayed Delivery, and To-Be-Announced Transactions. Natural
Resources, Real Estate, Short-Intermediate, AGE, German Government, Global
Government and Global Bond may purchase and sell obligations on a "when issued"
or "delayed delivery" basis. Natural Resources, AGE, Short-Intermediate and
Global Government are not subject to any percentage limit with respect to these
types of obligations. German Government may only invest up to 25% of its assets
in such transactions. These transactions are arrangements in which a fund
purchases securities with payment and delivery scheduled for a future time,
generally within two weeks. Although AGE, Real Estate, Natural Resources, and
Short-Intermediate will generally purchase securities on a when-issued basis
with the intention of acquiring the securities, they may sell the securities
before the settlement date if it is deemed advisable. When a fund is the buyer
in these transactions, it will maintain with its custodian bank, in an account
that is separate and apart from its normal custody account, cash or securities
having a total value equal to the amount of the fund's commitment until payment
for the obligation is made. Government Securities may purchase and sell GNMA
certificates on a "To-Be-Announced" ("TBA") and "delayed delivery" basis, and is
not subject to any percentage limit with respect to these transactions. These
transactions are arrangements under which the fund may purchase securities with
payment and delivery scheduled for a future time up to 60 days after purchase.
Purchases of securities on a when-issued, delayed delivery or TBA basis are
subject to market fluctuation and 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. If the other party to a when-issued, delayed
delivery or TBA transaction fails to complete the transaction, the fund could
miss a favorable price or yield opportunity. Securities purchased on a
when-issued, delayed delivery or TBA basis do not generally earn interest until
their scheduled delivery date.
Zero Coupon and Pay-In-Kind Bonds. The credit risk factors pertaining to lower
rated securities also apply to lower rated zero coupon, deferred interest, and
pay-in-kind bonds. These bonds carry an additional risk in that, unlike bonds
that pay interest throughout the period to maturity, the fund will realize no
cash until the cash payment date and, if the issuer defaults, the fund may
obtain no return at all on its investment. Zero coupon, deferred interest, and
pay-in-kind bonds involve additional special considerations.
Zero coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security, and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Mutual Shares, Discovery Shares, Smaller Companies, Templeton Foreign, Greater
European, Latin America, Japan, Global Bond, AGE and Value may purchase
pay-in-kind bonds. Pay-in-kind bonds are securities that pay interest through
the issuance of additional bonds. The fund will be deemed to receive interest
over the life of such bonds and be treated as if interest were paid on a current
basis for federal income tax purposes, although no cash interest payments are
received by the fund until the cash payment date or until the bonds mature.
Accordingly, during periods when the fund receives no cash interest payments on
its zero coupon securities or deferred interest or pay-in-kind bonds, it may be
required to dispose of portfolio securities to meet distribution requirements
and such sales may be subject to the risk factors discussed above. AGE and Value
are not limited in the amount of their assets that may be invested in these
securities.
Description of Ratings
Corporate Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
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 which 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. Such
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. Such 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 which are speculative in a high
degree. Such 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.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Commercial Paper Ratings
Moody's
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Fitch's
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect on assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
FRANKLIN TEMPLETON
FUND ALLOCATOR
SERIES
STATEMENT OF
ADDITIONAL INFORMATION
DECEMBER 31, 1996
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
CONTENTS PAGE
How does the Fund Invest its Assets? 2
Investment Restrictions .......... 14
Officers and Trustees ............ 15
Investment Advisory, Asset Allocation
and Other Services .............. 18
How does the Fund Buy Securities
for its Portfolio? .............. 19
How Do I Buy, Sell and
Exchange Shares? ................ 20
How are Fund Shares Valued? ...... 23
Additional Information on
Distributions and Taxes......... 24
The Fund's Underwriter ........... 30
How does the Fund
Measure Performance? ............ 31
Miscellaneous Information ........ 34
Useful Terms and Definitions ..... 35
Financial Statements
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
Franklin Templeton Fund Allocator Series (the "Trust") is an open-end management
investment company consisting of three separate non-diversified series: Franklin
Templeton Conservative Target Fund, Franklin Templeton Moderate Target Fund and
Franklin Templeton Growth Target Fund. Each series may be referred to as the
"Fund" or "Funds."
The Prospectus, dated December 31, 1996, as may be amended from time to time,
contains the basic information you should know before investing in the Funds.
For a free copy, call 1-800/DIAL BEN or write the Trust at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE
FUNDS, AND SHOULD BE READ IN CONJUNCTION WITH THE Prospectus.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
How does the Fund Invest its Assets?
As described in the Fund's Prospectus, each Fund may invest its assets directly
in the types of securities in which the Underlying Funds invest and may engage
directly in the types of investment strategies in which each Underlying Fund may
engage.
The following information supplements and should be read in conjunction with the
sections in the Funds' Prospectus entitled "How does the Fund Invest its
Assets?"; "What are the Fund's Potential Risks?"; "How do the Underlying Funds
Invest their Assets?"; and "What are some of the Other Investment Policies and
Strategies of, and Risks of an Investment in, the Underlying Funds?"
OPTIONS ON SECURITIES AND SECURITIES INDICES
Call and Put Options on Securities. Certain Underlying Funds may write covered
put and call options and purchase put and call options that are listed on
domestic or foreign securities exchanges or traded in the over-the-counter
market.
Writing Call and Put Options. A call option gives the option holder the right to
buy the underlying securities from the option writer at a stated exercise price.
A put option gives the option holder the right to sell the underlying security
at the option exercise price at any time during the option period.
A call option written by an Underlying Fund is "covered" if the fund owns the
underlying security that is subject to the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the fund holds a call on the same security and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the fund in cash and securities in a segregated account with its
custodian bank. A put option written by the fund is "covered" if the fund
maintains cash and securities with a value equal to the exercise price in a
segregated account with its custodian bank, or else holds a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written. The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since, with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security at the
exercise price, which will usually exceed the then current market value of the
underlying security. The writer of an option who wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option of the same series as the option previously written. The effect
of the purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction will be available to be effected at the
time desired by the fund.
Effecting a closing transaction in the case of a written call option will permit
the fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or securities. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
fund investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
A fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; a fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the fund may elect to close the
position or take delivery of the security at the exercise price and the fund's
return will be the premium received from the put options minus the amount by
which the market price of the security is below the exercise price.
Buying Call and Put Options. Certain of the Underlying Funds may buy call
options. Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the amount
received is more or less than the premium paid for the call option plus the
related transaction costs.
An Underlying Fund, for example, may buy put options on particular securities in
order to protect against a decline in the market value of the underlying
security below the exercise price less the premium paid for the option. The
ability to buy put options will allow the fund to protect the unrealized gain in
an appreciated security in its portfolio without actually selling the security.
In addition, the fund will continue to receive interest or dividend income on
the security. When an Underlying Fund sells a put option that it has previously
purchased prior to the sale of the securities underlying such option, such sales
will result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid for
the put option that is sold. Such gain or loss may be wholly or partially offset
by a change in the value of the underlying security which the fund owns or has
the right to acquire.
Options on Stock Indices. Certain of the Underlying Funds may also buy and write
call and put options on stock indices. Call and put options on stock indices are
similar to options on securities except that, rather than the right to buy or
sell particular securities at a specified price, options on a stock index give
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the underlying stock index is greater than (or less
than, in the case of puts) the exercise price of the option. This amount of cash
is equal to the difference between the closing price of the index and the
exercise price of the option expressed in dollars multiplied by a specified
number. Thus, unlike stock options, all settlements are in cash, and gain or
loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
When an Underlying Fund writes an option on a stock index, it will establish a
segregated account with its custodian bank in an amount at least equal to the
market value of the underlying stock index and will maintain the account while
the option is open or it will otherwise cover the transaction.
Over-the-Counter ("OTC") Options. Certain of the Underlying Funds may write
covered put and call options and purchase put and call options which trade in
the over-the-counter market. Just as with exchange traded options, OTC call
options give the option holder the right to buy an underlying security from an
option writer at a stated exercise price; OTC put options give the holder the
right to sell an underlying security to an option writer at a stated exercise
price. OTC options differ from exchange traded options in certain material
respects. OTC options are arranged directly with dealers and not, as is the case
with exchange traded options, with a clearing corporation. Thus, there is the
risk of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities and in a wider range
of expiration dates and exercise prices than exchange traded options; and the
writer of an OTC option is paid a premium in advance by the dealer. (For
additional risks relating to OTC options, see "Risk Factors and Considerations
Regarding Options, Futures and Options on Futures").
Forward Conversions. Certain Underlying Funds may engage in forward conversions.
In a forward conversion, an Underlying Fund buys securities and writes call
options and buys put options on such securities. By purchasing puts, the fund
protects the underlying security from depreciation in value. By selling or
writing calls on the same security, the fund receives premiums which may offset
part or all of the cost of purchasing the puts while forgoing the opportunity
for appreciation in the value of the underlying security.
The use of options in connection with forward conversions is intended to hedge
against fluctuations in the market value of the underlying security. Although it
is generally intended that the exercise price of put and call options would be
identical, situations might occur in which some option positions are acquired
with different exercise prices. Therefore, the fund's return may depend in part
on movements in the price of the underlying security because of the different
exercise prices of the call and put options. Such price movements may also
affect a fund's total return if the conversion is terminated prior to the
expiration date of the option. In such event, a fund's return on forward
conversions may be greater or less than it would have been if it had hedged the
security only by purchasing put options.
Spread and Straddle Options Transactions. In "spread" transactions, an
Underlying Fund buys and writes a put or buys and writes a call on the same
underlying security with the options having different exercise prices and/or
expiration dates. In "straddles," an Underlying Fund purchases or writes
combinations of put and call options on the same security. When the fund engages
in spread and straddle transactions, it seeks to profit from differentials in
the option premiums paid and received and in the market prices of the related
options positions when they are closed out or sold. Because these transactions
require the fund to buy and/or write more than one option simultaneously, the
fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the fund was to
buy or sell a single option. Similarly, costs incurred by the fund in connection
with these transactions will in many cases be greater than if the fund was to
buy or sell a single option.
FUTURES TRANSACTIONS
Certain of the Underlying Funds may purchase or sell (i) financial futures
contracts; (ii) interest rate futures contracts; (iii) options on interest rate
futures contracts; (iv) stock and bond index futures contracts; and (v) options
on stock and bond index futures contracts (collectively, "Futures
Transactions"). A fund may enter into such Futures Transactions on domestic
exchanges and, to the extent such transactions have been approved by the CFTC
for sale to customers in the U.S., on foreign exchanges.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian, 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 to the futures commission merchant an amount equal to such
change in value. In the event a fund has insufficient cash, it may have to sell
portfolio securities at a time when it may be disadvantageous to do so in order
to meet such daily variation margins.
A futures contract may generally be described as an agreement between two
parties to buy and sell particular financial instruments for an agreed price
during a designated month (or to deliver the final cash settlement price, in the
case of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, each fund can
seek, through the sale of futures contracts, to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising, a
fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when they affect
anticipated purchases. Similarly, a fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A fund can
purchase futures contracts on foreign currency to fix the price in U.S. dollars
or a security denominated in such currency that the fund has acquired or expects
to acquire.
Although futures contracts by their terms generally call for the actual delivery
or acquisition of underlying securities or the cash value of the index, in most
cases the contractual obligation is fulfilled before the date of the contract
without having to make or take such delivery. The contractual obligation is
offset by buying (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, which is effected through a member of an exchange, cancels the
obligation to make or take delivery of the securities or the cash value of the
index underlying the contractual obligations. A fund may incur brokerage fees
when it purchases or sells futures contracts.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or loss. While each fund's futures contracts on securities or currency
will usually be liquidated in this manner, a fund may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for it to do so. A clearing corporation associated
with the exchange on which futures on securities or currency are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Options on Futures Contracts. The acquisition of put and call options on futures
contracts will give a fund the right (but not the obligation), for a specified
price, to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, a fund obtains the benefit of the futures position if prices move in a
favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
Financial Futures Contracts. Financial futures are contracts that obligate the
holder to take or make delivery of a specified quantity of a financial
instrument, such as a U.S. Treasury security or foreign currency, during a
specified future period at a specified price. A "sale" of a financial 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 financial 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.
Interest Rate Futures Contracts. Interest rate futures contracts are futures
contracts on debt securities. The value of these instruments changes in response
to changes in the value of the underlying debt security, which depends primarily
on prevailing interest rates.
A fund may, for example, enter into interest rate futures contracts in order to
protect its portfolio securities from fluctuations in interest rates without
necessarily buying or selling the underlying fixed-income securities. For
example, if a fund owns bonds, and interest rates are expected to increase, it
might sell futures contracts on debt securities having characteristics similar
to those held in the portfolio. Such a sale would have much the same effect as
selling an equivalent value of the bonds owned by a fund. If interest rates did
increase, the value of the debt securities in the portfolio would decline, but
the value of the futures contract to a fund would increase at approximately the
same rate, thereby keeping the Net Asset Value of the fund from declining as
much as it otherwise would have.
Stock Index Futures Contracts. A stock index futures contract obligates the
seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement was made. Open futures contracts are valued on a daily
basis, and a fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
For example, an Underlying Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of its equity securities that might otherwise result. When a fund
is not fully invested in stocks and it anticipates a significant market advance,
it may buy stock index futures in order to gain rapid market exposure that may
in part or entirely offset increases in the cost of stocks that it intends to
buy.
Options on Stock Index Futures. Certain of the Underlying Funds may buy and sell
call and put options on stock index futures. Call and put options on stock index
futures are similar to options on securities except that, rather than the right
to buy stock at a specified price, options on stock index futures give the
holder the right to receive cash. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date.
Bond Index Futures and Options on such Futures. Certain of the Underlying Funds
may buy and sell futures contracts based on an index of debt securities and
options on such futures contracts to the extent they currently exist and, in the
future, may be developed. These funds reserve the right to conduct futures and
options transactions based on an index that may be developed in the future to
correlate with price movements in certain categories of debt securities. An
Underlying Fund's investment strategy in employing futures contracts based on an
index of debt securities may be similar to that used by it in other financial
futures transactions. Certain of the Underlying Funds may also buy and write put
and call options on such index futures and enter into closing transactions with
respect to such options.
Future Developments. Certain of the Underlying Funds may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other derivative investments that are not presently
contemplated for use by such funds or which are not currently available but that
may be developed, to the extent such opportunities are both consistent with the
Underlying Fund's investment objectives and legally permissible for the fund.
CURRENCY TRANSACTIONS
Certain of the Underlying Funds may enter into forward currency exchange
contracts and currency futures contracts and options on such futures contracts,
as well as purchase put or call options and write covered put and call options
on currencies traded in U.S. or foreign markets.
Forward Currency Exchange Contracts and Currency Futures Contracts. A forward
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks).
An Underlying Fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the fund's investment manager (or sub-adviser)
determines that there is a pattern of correlation between the two currencies.
Certain of the Underlying Funds may also purchase and sell forward contracts (to
the extent they are not deemed "commodities") for non-hedging purposes when the
investment manager (or sub-adviser) anticipates that the foreign currency will
appreciate or depreciate in value, but securities denominated in that currency
do not present attractive investment opportunities and are not held in a fund's
portfolio.
The fund's custodian will place cash or securities into a segregated account of
each fund in an amount equal to the value of the fund's total assets committed
to the forward foreign currency exchange contracts requiring each fund to
purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or securities is placed in the
account on a daily basis so that the value of the account equals the amount of
each fund's commitments with respect to such contracts. The segregated account
is marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate these contracts. In such event, a
fund's ability to utilize forward foreign currency exchange contracts may be
restricted.
While an Underlying Fund may enter into forward contracts to reduce currency
exchange rate risks, transactions in forward contracts involve certain other
risks. Thus, while a fund may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for a fund
than if it had not engaged in any such transactions. Moreover, there may be
imperfect correlation between a fund's portfolio holdings of securities
denominated in a particular currency and forward contracts entered into by the
fund. Such imperfect correlation may cause a fund to sustain losses which will
prevent the fund from achieving a complete hedge or expose the fund to risk of
foreign exchange loss.
Currency Futures Contracts and Options Thereon. Certain of the Underlying Funds
will also engage in futures contracts on foreign currencies and related options
transactions. A currency futures contract is a standardized contract for the
future delivery of a specified amount of currency at a future date at a price
set at the time of the contract. A fund may enter into currency futures
contracts traded on regulated commodity exchanges, including non-U.S. exchanges.
A fund may either accept or make delivery of the currency specified at the
maturity of a forward or futures contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to forward contracts are usually effected with
the currency trader who is a party to the original forward contract.
Certain of the Underlying Funds may enter into forward currency exchange
contracts and currency futures contracts in several circumstances. For example,
when a fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency (or options contracts with respect to such
futures contracts), or when a fund anticipates the receipt in a foreign currency
of dividends or interest payments on such a security that it holds, it may
desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. In
addition, when the investment manager (or sub-adviser) believes that the
currency of a particular country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward or futures contract to sell, for a
fixed amount of U.S. dollars, the amount of that currency approximating the
value of some or all of a fund's portfolio securities denominated in such
currency. The precise matching of the forward contract amounts and the value of
the securities involved is not generally possible because the future value of
such securities in foreign currencies changes as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which each fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of each fund's foreign
assets.
Writing and Purchasing Currency Call and Put Options. Certain of the Underlying
Funds may write covered put and call options and purchase put and call options
on foreign currencies. Such funds may use options on currency to cross-hedge,
which involves writing or purchasing options on one currency to hedge against
changes in exchange rates for a different currency with a pattern of
correlation. In addition, a fund may purchase call options on currency for
non-hedging purposes when the investment manager (or sub-adviser) anticipates
that the currency will appreciate in value, but the securities denominated in
that currency do not present attractive investment opportunities and are not
included in a fund's portfolio.
A call option written by a fund obligates the fund to sell specified currency to
the holder of the option at a specified price at any time before the expiration
date. A put option written by a fund would obligate the fund to purchase
specified currency from the option holder at a specified time before the
expiration date. The writing of currency options involves risk that a fund will,
upon exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
A fund may terminate its obligations under a call or put option by purchasing an
option identical to the one it has written. Such purchases are referred to as
"closing purchase transactions." A fund would also be able to enter into closing
sale transactions in order to realize gains or minimize losses on options
purchased by the fund.
The purchase of a call option would entitle a fund, in return for the premium
paid, to purchase specified currency at a specified price during the option
period. A fund would ordinarily realize a gain if, during the option period, the
value of such currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise the fund would realize either no gain or a loss
on the purchase of the call option. A fund may forfeit the entire amount of the
premium plus related transaction costs if exchange rates move in a manner
adverse to the fund's position.
A fund may, for example, purchase put options in anticipation of a decline in
the dollar value of currency in which securities in its portfolio are
denominated ("protective puts"). The purchase of a put option would entitle a
fund, in exchange for the premium paid, to sell specific currency at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the dollar value of a fund's
portfolio securities due to currency exchange rate fluctuations. A fund would
ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of the underlying currency. Foreign currency options to be
written or purchased by a fund will be traded on U.S. or foreign exchanges or
over-the-counter.
Buyers and sellers of currency futures and options thereon are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
RISK FACTORS AND CONSIDERATIONS REGARDING
OPTIONS, FUTURES AND OPTIONS ON FUTURES.
With respect to an Underlying Fund's hedging strategies, the fund bears the risk
that the prices of the securities being hedged will not move in the same amount
as the hedging instrument. It is also possible that there may be a negative
correlation between the index, securities or currencies underlying the hedging
instrument and the hedged securities which would result in a loss on both such
securities and the hedging instrument. In addition, it is not possible to hedge
fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of such
securities is also likely to fluctuate as a result of independent factors not
related to currency fluctuations. Therefore, perfect correlation between a
fund's futures positions and portfolio positions will be impossible to achieve.
Accordingly, successful use by a fund of options on stock or bond indices,
financial and currency futures contracts and related options, and currency
options will be subject to the investment manager's ability to predict correctly
movements in the direction of the securities and currency markets generally or
of a particular segment. If a fund's investment manager is not successful in
employing such instruments in managing a fund's investments, the fund's
performance will be worse than if it did not employ such strategies. In
addition, a fund will pay commissions and other costs in connection with such
investments, which may increase the fund's expenses and reduce the return. In
writing options on futures, a fund's loss is potentially unlimited and may
exceed the amount of the premium received.
In certain cases, the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed more effectively and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities. However, there are risks involved in
these transactions as discussed above.
Positions in stock index options, stock and bond index futures contracts,
financial futures contracts, foreign currency futures contracts, related options
on futures and options on currencies 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 option, futures contract or option thereon
at any specific time. Thus, it may not be possible to close such an option or
futures position. The inability to close options or futures positions could have
an adverse impact on a fund's ability to effectively hedge its securities or
foreign currency exposure.
When trading options on foreign exchanges or in the OTC market many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
In the case of OTC options, there can be no assurance that a continuous liquid
secondary market will exist for any particular OTC option at any specific time.
Consequently, a fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale transaction with
the dealer that issued it. Similarly, when the fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the fund originally
wrote the option. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires or
the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for other
investment purposes while it is obligated as a put writer. Similarly, a
purchaser of such put or call option might also find it difficult to terminate
its position on a timely basis in the absence of a secondary market.
The ability to terminate OTC options is more limited than with exchange traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. Until such time as the staff of
the SEC changes its position, each fund will treat purchased OTC options and all
assets used to cover written OTC options as illiquid securities, except that
with respect to options written with primary dealers in U.S. government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the staff of the Commission.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange of the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
In the case of futures, 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 fund does not believe that these
trading and positions limits will have an adverse impact on the fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the investment manager may
still not result in a successful transaction.
CONVERTIBLE SECURITIES
Certain of the Underlying Funds may invest in convertible securities. As with a
straight fixed-income security, a convertible security tends to increase in
market value when interest rates decline and decrease in value when interest
rates rise. Like a common stock, the value of a convertible security also tends
to increase as the market value of the underlying stock rises, and it tends to
decrease as the market value of the underlying stock declines. Because its value
can be influenced by both interest rate and market movements, a convertible
security is not as sensitive to interest rates as a similar fixed-income
security, nor is it as sensitive to changes in share price as its underlying
stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
While an Underlying Fund uses the same criteria to rate a convertible debt
security that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred stock
is subordinated to all debt obligations in the event of insolvency, and an
issuer's failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. A preferred stock generally
has no maturity date, so that its market value is dependent on the issuer's
business prospects for an indefinite period of time. In addition, distributions
from preferred stock are dividends, rather than interest payments, and are
usually treated as such for corporate tax purposes.
ILLIQUID SECURITIES
Generally, an "illiquid security" is any security that cannot be disposed of
promptly (e.g., within seven days) and in the ordinary course of business at
approximately the amount at which the fund has valued the instrument. Subject to
this limitation, the boards have authorized certain Underlying Funds to invest
in certain restricted securities where such investment is consistent with the
fund's investment objectives and has authorized such securities to be considered
liquid to the extent the investment manager determines that there is a liquid
institutional or other market for such securities, such as restricted securities
that may be freely transferred among qualified institutional buyers pursuant to
Rule 144A under the 1933 Act, as amended, and for which a liquid institutional
market has developed. The fund boards will review periodically any determination
by the investment manager to treat a restricted security as liquid, including
the investment manager's assessment of current trading activity and the
availability of reliable price information. To the extent a fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
may be increased if qualified institutional buyers become uninterested in buying
these securities or the market for these securities contracts.
INVESTMENTS IN FOREIGN SECURITIES
Securities which are acquired by an Underlying Fund outside the United States
and which are publicly traded in the United States or on a foreign securities
exchange or in a foreign securities market are not considered by the fund to be
illiquid assets so long as the fund acquires and holds the securities with the
intention of reselling the securities in the foreign trading market, the fund
reasonably believes it can readily dispose of the securities for cash in the
U.S. or foreign market and current market quotations are readily available.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries.
Investments in foreign securities where delivery takes place outside the United
States will have to be made in compliance with any applicable United States and
foreign currency restrictions and tax laws (including laws imposing withholding
taxes on any dividend or interest income) and laws limiting the amount and types
of foreign investments. Changes of governmental administrations or of economic
or monetary policies, in the United States or abroad, or changed circumstances
in dealings between nations or currency convertibility or exchange rates could
result in investment losses for the fund. Investments in foreign securities may
also subject the fund to losses due to nationalization, expropriation or
differing accounting practices and treatments. Moreover, investors should
recognize that foreign securities are often traded with less frequency and
volume, and therefore may have greater price volatility, than is the case with
many U.S. securities. Investments by an Underlying Fund in the securities of
foreign issuers may tend to increase the risks with respect to the liquidity of
the fund's portfolio and the fund's ability to meet a large number of
shareholders' redemption requests should there be economic or political turmoil
in a country in which the fund has a substantial portion of its assets invested
or should relations between the United States and foreign countries deteriorate
markedly. Furthermore, the reporting and disclosure requirements applicable to
foreign issuers may differ from those applicable to domestic issuers, and there
may be difficulties in obtaining or enforcing judgments against foreign issuers.
Investments in Eastern Europe and Russia. Certain Eastern European countries,
which do not have market economies, are characterized by an absence of developed
legal structures governing private and foreign investments and private property.
Certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment of foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals.
Governments in certain Eastern European countries may require that a
governmental or quasi-governmental authority act as custodian of a fund's assets
invested in such country. To the extent such governmental or quasi-governmental
authorities do not satisfy the requirements of the 1940 Act, to act as foreign
custodians of a fund's cash and securities, the fund's investment in such
countries may be limited or may be required to be effected through
intermediaries. The risk of loss through governmental confiscation may be
increased in such countries.
Certain of the Underlying Funds may invest a portion of their assets in Russian
securities, subject to the availability of an eligible foreign subcustodian
approved by a fund's board of directors or trustees, as the case may be, in
accordance with Rule 17f-5 under the 1940 Act. There can be no assurance that
appropriate sub-custody arrangements will be available to the funds if and when
one or more of the funds seeks to invest a portion of its assets in Russian
securities.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (i) delays in settling portfolio transactions and risk of loss arising
out of Russia's system of share registration and custody; (ii) the risk that it
may be impossible or more difficult than in other countries to obtain and/or
enforce a judgment; (iii) pervasiveness of corruption and crime in the Russian
economic system; (iv) currency exchange rate volatility and the lack of
available currency hedging instruments; (v) higher rates of inflation (including
the risk of social unrest associated with periods of hyperinflation); (vi)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on a fund's ability to exchange local currencies for U.S. dollars; (vii) the
risk that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (viii) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (ix)
dependency on exports and the corresponding importance of international trade;
(x) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (xi) possible
difficulty in identifying a purchaser of securities held by a Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for a fund to lose its
registration through fraud, negligence or even mere oversight. While an
Underlying Fund will endeavor to ensure that its interest continues to be
appropriately recorded either itself or through a custodian or other agent
inspecting the share register and by obtaining extracts of share registers
through regular confirmations, these extracts have no legal enforceability and
it is possible that subsequent illegal amendment or other fraudulent act may
deprive a fund of its ownership rights or improperly dilute its interests. In
addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for a fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration. Furthermore, although a Russian
public enterprise with more than 1,000 shareholders is required by law to
contract out the maintenance of its shareholder register to an independent
entity that meets certain criteria, in practice this regulation has not always
been strictly enforced. Because of this lack of independence, management of a
company may be able to exert considerable influence over who can purchase and
sell the company's shares by illegally instructing the registrar to refuse to
record transactions in the share register. This practice may prevent an
Underlying Fund from investing in the securities of certain Russian companies
deemed suitable by its investment manager. Further, this could cause a delay in
the sale of Russian company securities by a fund if a potential purchaser is
deemed unsuitable, which may expose the fund to potential loss on the
investment.
Investments in Latin America. Investing in Latin American issuers involves a
high degree of risk and special considerations not typically associated with
investing in the United States and other more developed securities markets, and
should be considered highly speculative. Such risks include: (i) restrictions or
controls on foreign investment and limitations on repatriation of invested
capital and Latin America's ability to exchange local currencies for U.S.
dollars; (ii) higher and sometimes volatile rates of inflation (including risk
of social unrest associated with periods of hyper-inflation); (iii) the risk
that certain Latin American countries, which are among the largest debtors to
commercial banks and foreign governments and which have experienced difficulty
in servicing sovereign debt obligations in the past, may negotiate to
restructure sovereign debt obligations; (iv) the risk that it may be impossible
or more difficult than in other countries to obtain and/or enforce a judgment;
(v) currency exchange rate fluctuations and the lack of available currency
hedging instruments; (vi) more substantial government involvement in and control
over the local economies; and (vii) dependency on exports and the corresponding
importance of international trade.
Latin American countries may be subject to a greater degree of economic,
political, and social instability than is the case in the United States, Japan,
or Western European countries. Such instability may result from, among other
things, the following: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in governmental
control through extra-constitutional means; (ii) popular unrest associated with
demands for improved political, economic, and social conditions; (iii) internal
insurgencies and terrorist activities; (iv) hostile relations with neighboring
countries; (v) ethnic, religious and racial disaffection; and (vi) drug
trafficking.
Investments in Japan. Japan Fund's concentration of its investments in Japan
means the fund will be more dependent on the investment considerations discussed
below and may be more volatile than a fund which is broadly diversified
geographically. Additional factors relating to Japan include the following.
In the past, Japan has experienced earthquakes and tidal waves of varying
degrees of severity, and the risks of such phenomena, and damage resulting
therefrom, continue to exist. Japan also has one of the world's highest
population densities. Approximately 45% of the total population of Japan is
concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya.
Since the end of World War II, Japan has experienced significant economic
development and among the free industrial nations of the world is second only to
the United States in terms of gross national product ("GNP"). During the years
of high economic growth in the 1960s and early 1970s, the expansion was based on
the development of heavy industries such as steel and shipbuilding. In the 1970s
Japan moved into assembly industries which employ high levels of technology and
consume relatively low quantities of resources, and since then has become a
major producer of electrical and electronic products and automobiles. Since the
mid-1980s Japan has become a major creditor nation, with extensive trade
surpluses. With the exception of periods associated with the oil crises of 1974
and 1978, Japan has generally experienced very low levels of inflation. There
is, of course, no guarantee these favorable trends will continue.
The Government of Japan has called for a transformation of the economy away from
its high dependency on export-led growth towards greater stimulation of the
domestic economy. In addition, there has been a move toward more economic
liberalization and discounting in the consumer sector. These shifts have already
begun to take place and may cause disruption in the Japanese economy.
Japan's economy is a market economy in which industry, and commerce are
predominantly privately owned and operated. However, the Government is involved
in establishing and meeting objectives for developing the economy and improving
the standard of living of the Japanese people.
Japan has historically depended on oil for most of its energy requirements.
Almost all of its oil is imported, with the majority imported from the Middle
East. In the past, oil prices have had a major impact on the domestic economy,
but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic industries to
processing and assembly-type industries, has contributed to the reduction of oil
consumption. However, there is no guarantee this favorable trend will continue.
Overseas trade is important to Japan's economy. Japan has few natural resources
and must export to pay for its imports of these basic requirements. Japan's
principal export markets are the United States, Canada, the United Kingdom,
Germany, Australia, Korea, Taiwan, Hong Kong and the People's Republic of China.
The principal sources of its imports are the United States, South East Asia and
the Middle East. Because of the concentration of Japanese exports in highly
visible products such as automobiles, machine tools and semiconductors and the
large trade surpluses ensuing therefrom, Japan has had difficult relations with
its trading partners, particularly the United States, where the trade imbalance
is the greatest. It is possible trade sanctions or other protectionist measures
could impact Japan adversely in both the short- and long-term.
Although under normal circumstances at least 80% of the Japan Fund's assets will
be invested in equity securities of Japanese issuers, the fund has the right to
purchase securities in any foreign country, developed or developing. Investors
should consider carefully the substantial risks involved in securities of
companies and governments of foreign nations, including Japan, which are in
addition to the usual risks inherent in domestic investments.
GOLD BULLION
As a means of seeking its principal objective of capital appreciation and when
it is felt to be appropriate as a possible hedge against inflation, Franklin
Gold Fund may invest a portion of its assets in gold bullion and may hold a
portion of its cash in foreign currency in the form of gold coins. There is, of
course, no assurance that such investments will provide capital appreciation or
a hedge against inflation. The fund's ability to invest in gold bullion is
restricted by the diversification requirements which the fund must meet in order
to qualify as a regulated investment company under the Code, as well as the
diversification requirements of the 1940 Act. In addition, the ability of the
fund to make such investments may be further restricted by the securities laws
and regulations in effect from time to time in the states where the fund's
shares are qualified for sale. The fund has not previously invested in gold
bullion because of these regulations. However, at the date of this SAI there do
not appear to be any regulations currently in effect in the states in which the
fund is qualified for sale prohibiting such purchases although some states may
limit such purchases. Accordingly, if otherwise consistent with the fund's
objectives, it only may invest up to 10% of its assets in gold bullion.
Fund assets will be invested in gold bullion at such times as the prospects of
such investments are, in the opinion of management, attractive in relation to
other possible investments. The basic trading unit for gold bullion is a gold
bar weighing approximately 100 troy ounces with a purity of at least 995/1000,
although gold bullion is also sold in much smaller units. Gold bars and wafers
are usually numbered and bear an indication of purity and the stamp or assay
mark of the refinery or assay office which certifies the bar's purity. Bars of
gold bullion historically have traded primarily in the New York, London, and
Zurich gold markets and in terms of volume, such gold markets have been the
major markets for trading in gold bullion. Prices in the Zurich gold market
generally correspond to the prices in the London gold market. Since the
ownership of gold bullion became legal in the United States on December 31,
1974, U.S. markets for trading gold bullion have developed. It is anticipated
that transactions in gold will generally be made in such U.S. markets, although
such transactions may be made in foreign markets when it is deemed to be in the
best interest of the fund. Transactions in gold bullion by the fund are
negotiated with principal bullion dealers unless, in the investment manager's
opinion, more favorable prices (including the costs and expenses described
below) are otherwise obtainable. Prices at which gold bullion is purchased or
sold include dealer mark-ups or mark-downs, insurance expenses, assay charges
and shipping costs for delivery to a custodian bank. Such costs and expenses may
be a greater or lesser percentage of the price from time to time, depending on
whether the price of gold bullion decreases or increases. Since gold bullion
does not generate any investment income, the only source of return to the fund
on such an investment will be from any gains realized upon its sale, and
negative return will be realized, of course, to the extent the fund sells its
gold bullion at a loss.
WARRANTS
A warrant is typically a long-term option issued by a corporation which gives
the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
an expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If an Underlying Fund does not exercise or dispose
of a warrant prior to its expiration, it will expire worthless.
SHORT-SELLING
In a short sale, an Underlying Fund sells a security it does not own in
anticipation of a decline in the market value of that security. To complete the
transaction, the fund must borrow the security to make delivery to the buyer.
The fund is then obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. Until the security is replaced, the
fund must pay the lender any dividends or interest that accrues during the
period of the loan. To borrow the security, the fund may also be required to pay
a premium, which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin re-quirements, until the short position is closed out.
An Underlying Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the fund replaces the borrowed security, and the fund will realize a gain
if the security declines in price between those same dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
any premium, dividends or interest the fund is required to pay in connection
with the short sale.
In addition to the short sales discussed above, certain of the Underlying Funds
may also make short sales "against the box." A short sale is "against the box"
to the extent that the fund contemporaneously owns or has the right to obtain at
no added cost securities identical to those sold short.
An Underlying Fund will place in a segregated account with its custodian bank an
amount equal to the difference between (a) the market value of the securities
sold short at the time they were sold short and (b) any cash or securities
required to be deposited as collateral with the broker in connection with the
short sale (not including the proceeds from the short sale). The segregated
account will be marked-to-market daily and at no time will the amount deposited
in the segregated account and with the broker as collateral be less than the
market value of the securities at the time they sold short.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. Each Fund may not:
1. Borrow money or mortgage or pledge any of its assets, except it may borrow up
to 331/3% of its total assets (including the amount borrowed) to meet redemption
requests that might otherwise require the untimely disposition of portfolio
securities or for other temporary or emergency purposes and may pledge its
assets in connection with these borrowings. The Fund may (a) borrow in
connection with short sales and "short sales against the box;" (b) borrow from
banks or other persons to the extent permitted by applicable law; (c) enter into
reverse repurchase agreements; (d) obtain short-term credit necessary for the
clearance of purchases and sales of its portfolio securities; and (e) make
margin payments in connection with futures, options and currency transactions.
2. Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests, except that the Fund could own real estate directly as a result of a
default on debt securities it owns. This restriction does not preclude
investments in marketable securities of issuers engaged in these activities.
4. Loan money, except as in consistent with the Fund's investment objective, and
except that the Fund may (a) buy a portion of an issue of publicly distributed
bonds, debentures, notes and other evidences of indebtedness, (b) enter into
repurchase agreements, (c) lend its portfolio securities, and (d) participate in
an interfund lending program with other Franklin Templeton Funds to the extent
permitted by the 1940 Act and any rules or orders thereunder.
5. Issue securities senior to the Fund's presently authorized shares of
beneficial interest, except that the Fund may borrow as permitted by these
restrictions.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
Notwithstanding the foregoing investment restrictions, the Underlying Funds in
which the Funds invest have adopted certain investment restrictions which may be
more or less restrictive than those listed above, thereby permitting a Fund to
engage in investment strategies indirectly that are prohibited under the
investment restrictions listed above. The investment restrictions of an
Underlying Fund are located in its SAI.
Pursuant to an exemptive order issued by the SEC (Investment Company Act Release
No. IC-22022, June 17, 1996) each Fund may (i) purchase more than 3% of the
outstanding voting securities of any Underlying Fund, (ii) invest more than 5%
of its assets in any one Underlying Fund and (iii) invest substantially all of
its assets in the Underlying Funds.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Trust,
including general supervision and review of its 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 affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Trust under the 1940 Act are indicated by an asterisk (*).
Positions and Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five
Years
Frank H. Abbott, III (75) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 32 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (64) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (64) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 31 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general partner,
as the case may be, of most other subsidiaries of Franklin Resources, Inc. and
of 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (56) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 61 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director, trustee or managing general
partner, as the case may be, of 27 of the investment companies in the Franklin
Group of Funds.
Gordon S. Macklin (68) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Source One Mortgage Services Corporation (information services), Shoppers
Express (information services), Spacelab, Inc. (aerospace technology); and
director, trustee or managing general partner, as the case may be, of 53 of the
investment companies in the Franklin Templeton Group of Funds; formerly
Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and
President, National Association of Securities Dealers, Inc.
Harmon E. Burns (51) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 61 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (64) Vice President -
777 Mariners Island Blvd. Financial Reporting
San Mateo, CA 94404 and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 38 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (36) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer, director and/or trustee of 61 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (47) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 61 of the investment companies in the Franklin
Templeton Group of Funds.
Donald P. Gould (38) President
777 Mariners Island Blvd.
San Mateo, CA 94404
Managing Director, Templeton Worldwide, Inc.; from November 1993 to present,
Executive Vice President, Franklin Institutional Services Corporation; from
January 1995 to present, Senior Vice President of Templeton Franklin Investment
Services, Inc.; from February 1992 to November 1993, independent consultant to
the Franklin Templeton Global Trust; and from February 1992 to June 1993,
independent consultant to Huntington Investment Trust. From December 1985 to
February 1992, Chairman of the Board of the Franklin Templeton Global Trust.
From 1988 to June 1993, President and Trustee, from 1988 to February 1992,
Chairman of the Board, Huntington Investment Trust. From October 1985 to
February 1992, President and Director of Huntington Advisers, Inc., a mutual
fund investment adviser, and President of Huntington Investments, Inc., a mutual
fund underwriter; trustee of two investment companies in the Franklin Group of
Funds.
Diomedes Loo-Tam (57) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 38 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (59) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 33 of the investment companies in the Franklin Group of
Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board may in the future
be, but are not currently, paid fees. As shown above, some of the nonaffiliated
Board members also serve as directors, trustees or managing general partners of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The following table provides
an estimate of the total fees to be paid to the nonaffiliated Board members by
the Trust, as well as the total fees paid to such Board members by the other
funds in the Franklin Templeton Group of Funds.
Number of
Total Fees Boards in the
Received from Franklin Templeton
the Franklin Group of Funds
Templeton Group on Which Each
Name of Funds** Serves***
- --------------------------------------------------------------------------------
Frank H. Abbott, III........... $162,420 31
Harris J. Ashton............... 327,925 56
S. Joseph Fortunato............ 344,745 58
David Garbellano............... 146,100 30
Frank W.T. LaHaye.............. 143,200 26
Gordon S. Macklin.............. 321,525 53
*For the fiscal year ended July 31, 1997.
**For the calendar year ended December 31, 1995.
***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 61 registered investment companies, with approximately 171 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
INVESTMENT ADVISORY, ASSET ALLOCATION AND OTHER SERVICES
Investment Manager and Services Provided. The Fund's investment manager is
Advisers. Pursuant to the investment advisory and asset allocation agreement
with the Fund, Advisers will determine how each Fund's assets will be invested
pursuant to the investment objectives and policies of each Fund set forth in the
Prospectus. Advisers will determine (a) the percentage range of assets of any
Fund that may be invested in U.S. equity, international equity, U.S. fixed
income, international fixed income and natural resources asset classes, (b) the
Underlying Funds in which the Funds may invest, and (c) the percentage of assets
that may be invested by each Fund in any one Underlying Fund. To the extent that
the Funds invest directly in securities and engage directly in various
investment practices, Advisers provides investment research and portfolio
management services, including the selection of securities for the Funds to buy,
hold or sell and the selection of brokers through whom the Funds' portfolio
transactions are executed. Advisers' activities are subject to the review and
supervision of the Board to whom Advisers renders periodic reports of the Funds'
investment activities. Advisers is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers 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 Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
Investment Advisory and Asset Allocation Agreement. The investment advisory and
asset allocation agreement is in effect until November 18, 1998. It may continue
in effect for successive annual periods if its continuance is specifically
approved at least annually by a vote of the Board or by a vote of the holders of
a majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the management
agreement or interested persons of any such party (other than as members of the
Board), cast in person at a meeting called for that purpose. The investment
advisory and asset allocation agreement may be terminated without penalty at any
time by the Board or by a vote of the holders of a majority of the Fund's
outstanding voting securities, or by Advisers on 60 days' written notice, and
will automatically terminate in the event of its assignment, as defined in the
1940 Act.
Administrative Services. FT Services provides certain administrative services
and facilities for the Fund at no charge. These include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements. FT Services is a wholly owned
subsidiary of Resources.
Shareholder Servicing Agent. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Custodians. Investors Services, in its capacity as transfer agent to each
Underlying Fund, acts as custodian of the shares of the Underlying Funds held by
the Funds. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Trust's independent auditors. For the fiscal year ending July 31,
1997, their auditing services will consist of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended July 31, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Orders for the purchase and sale of shares of the Underlying Funds will be
placed directly with Distributors, which also acts as principal underwriter for
shares of the Underlying Funds.
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by Advisers in accordance with criteria set forth in the
investment advisory and asset allocation agreement and any directions that the
Board may give.
When placing a portfolio transaction in circumstances where the Fund purchases
securities directly and not through the Underlying Funds, Advisers seeks to
obtain prompt execution of orders at the most favorable net price. When
portfolio transactions are done on a securities exchange, the amount of
commission paid by the Fund is negotiated between Advisers and the broker
executing the transaction. The determination and evaluation of the
reasonableness of the brokerage commissions paid in connection with portfolio
transactions are based to a large degree on the professional opinions of the
persons responsible for the placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions being
paid by other institutional investors of comparable size. Advisers will
ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of Advisers, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
The amount of commission is not the only factor Advisers considers in the
selection of a broker to execute a trade. If Advisers believes it is in the
Fund's best interest, Advisers may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Fund will
pay a higher commission than if no weight were given to the broker's furnishing
of these services. This will be done only if, in the opinion of Advisers, the
amount of any additional commission is reasonable in relation to the value of
the services. Higher commissions will be paid only when the brokerage and
research services received are bona fide and produce a direct benefit to the
Fund or assist Advisers in carrying out its responsibilities to the Fund, or
when it is otherwise in the best interest of the Fund to do so, whether or not
such services may also be useful to Advisers in advising other clients.
When Advisers believes several brokers are equally able to provide the best net
price and execution, it may decide to execute transactions through brokers who
provide quotations and other services to the Fund, in an amount of total
brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
With respect to fixed-income securities, most purchases by the Fund are
principal transactions at net prices and 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 received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers 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, consistent with
internal policies, the sale of Fund shares, as well as shares of other funds in
the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next investment
management fee payable to Advisers 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 Advisers 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
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. 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 1933 Act.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
Sales
Size of Purchase - U.S. dollars Charge
- ------------------------------------------
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
Other Payments to Securities Dealers. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Letter of Intent. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13 month period, there will be an upward
adjustment of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. The upward adjustment does not apply to certain
retirement plans. If you execute a Letter before a change in the sales charge
structure of the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time the Letter
was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Reinvestment Date. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
Systematic Withdrawal Plan. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
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.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Securities issued by
open-end investment companies, such as the Underlying Funds, are valued using
their respective Net Asset Values for purchase orders placed at the close of the
Exchange.
The following discussion addresses circumstances where a Fund purchases
securities directly. Portfolio securities listed on a securities exchange or on
the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is no
such reported sale, within the range of the most recent quoted bid and ask
prices. Over-the-counter portfolio securities are valued within the range of the
most recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Net Asset Value of each class. If events materially affecting the values
of these foreign securities occur during this period, the securities will be
valued in accordance with procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class 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 scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
1. DISTRIBUTIONS OF NET INVESTMENT INCOME.
The Underlying Funds receive income generally in the form of dividends,
interest, original issue, market and acquisition discount and other income
derived from its investments. This income, less the expenses incurred in the
Underlying Funds' operations, is the net investment income of the Underlying
Funds from which income dividends may be paid to the Funds. This income of the
Funds, together with any income on direct investments made by the Funds (net of
any direct expenses of the Funds), in turn becomes the basis for each Fund's
distributions to you out of net investment income. Any distributions by the
Funds from such income will be taxable to you, whether you take them in cash or
in additional shares.
2. DISTRIBUTIONS OF CAPITAL GAIN.
The Underlying Funds may derive capital gains or losses in connection with sales
of its portfolio securities. To the extent that an Underlying Fund earns a net
short-term capital gain (an excess of net short-term capital gain over net
long-term capital loss) during its fiscal year, the Funds' respective portion of
that gain will be distributed to the Funds as an ordinary dividend and will
become part of the Fund's net investment income as described immediately above.
To the extent that an Underlying Fund earns a net capital gain (an excess of net
long-term capital gain over net short-term capital loss), a Fund's respective
portion of that gain will be distributed to the Fund as a capital gain dividend,
and will become part of such Fund's long-term capital gain. It is unlikely that
any of the Funds will realize any significant short-term capital gain on its
direct investments in securities, but to the extent that it does so, that gain
when distributed to you will be taxable as ordinary income. Distributions paid
to you from net capital gain on direct investments made by each Fund, and from
capital gain dividends paid to each Fund by any of the Underlying Funds will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in the Fund. Distributions of net short-term and long-term capital
gain can only be made by the Underlying Funds or any of the Funds to the extent
that each Fund's net short-term and long-term capital gain exceeds any available
capital loss carryovers. Any resulting net short-term or long-term capital gains
in each of the Funds will generally be distributed once each year, and may be
distributed more frequently, if necessary, in order to reduce or eliminate
federal excise or income taxes on the Fund.
3. CERTAIN DISTRIBUTIONS PAID IN JANUARY.
Distributions from the Funds which are declared in December to shareholders of
record in such month, and paid to you in January of the following year, will be
treated for tax purposes as if they had been received by you on December 31 of
the year in which they were declared. Each Fund will report this income to you
on your Form 1099-DIV for the year in which these distributions were declared.
4. IMPACT OF CERTAIN SECURITIES AND TRANSACTIONS ON AVAILABLE DISTRIBUTIONS.
To the extent that any of the Underlying Funds invest in foreign securities, the
gains that they realize on changes in the foreign currency in which the
investments are made (foreign exchange gains) will be classified as ordinary
income to the Underlying Fund. When these gains are distributed to the Funds,
and subsequently are distributed to you, they will be taxable as ordinary
income. Similarly, foreign exchange losses realized by the Underlying Funds,
including any losses realized on the sale of foreign debt securities, will
generally be treated as ordinary losses for federal income tax purposes. This
treatment could increase or reduce the Underlying Fund's income available for
distribution to the Fund, and, in turn, the Fund's distributions of ordinary
income to you. This may cause some or all of the Fund's previously distributed
income to be classified as a return of capital.
5. INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS.
Each Fund will inform you of the amount and character of your distributions at
the time they are paid, and will advise you of the tax status for federal income
tax purposes of such distributions shortly after the close of each calendar
year. Shareholders who have not held Fund shares for a full year may have
designated and distributed to them as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of their investment in the Fund.
TAXES
1. ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY.
Each Fund intends to elect and qualify to be treated as a regulated investment
company under Subchapter M of the Code. The Trustees reserve the right not to
qualify or maintain the qualification of a Fund as a regulated investment
company if they determine such course of action to be beneficial to you. In such
case, the Fund will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of each Fund's available earnings and
profits.
In order to qualify as a regulated investment company for tax purposes, each
Fund must meet certain specific requirements, including:
o The Fund must maintain a diversified portfolio of securities, wherein, at
the close of each quarter of the taxable year, (i) not more than 25% of the
value of the Fund's total assets are invested in securities (other than
U.S. government securities and securities of other regulated investment
companies) of any one issuer, and (ii) at least 50% of the value of the
Fund's total assets are invested in cash, cash equivalents, U.S. government
securities, securities of other regulated investment companies, and other
securities which, with respect to a single issuer, do not exceed 5% of the
value of the Fund's total assets;
o The Fund must derive 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale of domestic
or foreign securities, and other income derived with respect to its
business of investing in such stock, securities or currencies;
o The Fund must realize less than 30% of its gross income for each fiscal
year from gains from the sale of securities and certain other assets that
have been held by the Fund for less than three months; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income for each of its fiscal years.
2. EXCISE TAX DISTRIBUTION REQUIREMENTS.
The Code requires each Fund to distribute at least 98% of its taxable ordinary
income earned during the calendar year and 98% of its capital gain net income
earned during the twelve month period ending October 31 (in addition to amounts
from the prior year that were neither distributed nor taxed to the Fund) to you
by December 31 of each year in order to avoid federal excise taxes. The Fund
intends as a matter of policy to declare and pay sufficient dividends in
December or January (and that are treated by you as received in December), but
can give no assurances that its distributions will be sufficient to eliminate
all such taxes.
3. REDEMPTION OF FUND SHARES.
Redemptions and exchanges of each Fund's shares are taxable transactions for
federal and state income tax purposes. You will recognize a gain or loss in an
amount equal to the difference between your tax basis and the amount you
received in exchange for your shares, subject to the rules described below. If
you hold your shares as a capital asset, the gain or loss that you realize will
be capital gain or loss, and will be long-term for federal income tax purposes
if you have held your shares for more than one year at the time of redemption or
exchange. Any loss incurred on the sale 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 with respect to your investment in
the Fund.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis on the new shares purchased.
4. DEFERRAL OF BASIS.
All or a portion of the sales charge that you paid for your shares in a Fund
will be excluded from your tax basis in any shares sold within 90 days of their
purchase (for the purpose of determining gain or loss upon the sale of such
shares) if you reinvest the sales proceeds in the Fund or in another fund in the
Franklin Templeton Group of Funds, and the sales charge that would otherwise
apply to your reinvestment is reduced or eliminated because of your reinvestment
with Franklin Templeton Funds. The portion of the sales charge excluded from
your tax basis in the shares sold will equal the amount that the sales charge is
reduced on your reinvestment. Any portion of the sales charge excluded from your
tax basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment in another Franklin Templeton Fund.
5. U.S. GOVERNMENT AND STATE OBLIGATIONS.
Because each of the Funds invests primarily in other regulated investment
companies, rather than in direct obligations of the U.S. government or in U.S.
territorial obligations, the Funds do not expect to pay dividends to you which
will qualify for exemption from state income taxation. To the extent each Fund
invests in such obligations, it may qualify some of its distributions to you for
state tax-exempt treatment, subject in some states to minimum investment
requirements that must be met by the Fund. At the end of each calendar year,
each Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your state personal income tax return. You
should consult with your own tax advisor to determine the application of your
state and local laws to these distributions. Because the rules on exclusion of
this income are different for corporations, corporate shareholders should
consult with their corporate tax advisors about whether any of their
distributions may be exempt from corporate income or franchise taxes.
6. DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS.
As a corporate shareholder, you should note that a portion of the dividends paid
by a Fund may qualify for the corporate dividends-received deduction. The amount
so qualified depends upon the aggregate amount of dividends received by the
Underlying Funds from domestic (U.S.) corporations. Corporate shareholders will
be permitted in some circumstances to deduct these qualified dividends
designated by a Fund, thereby reducing the tax that a corporate shareholder
would otherwise be required to pay on such dividends. The amount that a Fund may
designate as eligible for the dividends-received deduction will be reduced or
eliminated if the shares on which the dividends were paid to an Underlying Fund
were debt-financed or held by the Underlying Fund for less than 46 days.
Similarly, if a corporate shareholder's Fund shares are debt-financed or held
for less than 46 days, then such corporate shareholder's dividends-received
deduction will be reduced or eliminated. Even if designated as dividends
eligible for the deduction, all dividends (including any deducted portion) must
be included in the computation of the corporation's alternative minimum taxable
income.
7. INVESTMENT IN COMPLEX SECURITIES.
An Underlying Fund's investment in options, futures contracts and forward
contracts, including transactions involving actual or deemed short sales or
foreign exchange gains or losses are subject to many complex and special tax
rules. Over-the-counter options on debt securities and equity options, including
options on stock and on narrow-based stock indexes, will be subject to tax under
Section 1234 of the Code, generally producing a long-term or short-term capital
gain or loss upon exercise, lapse, or closing out of the option or sale of the
underlying stock or security. Certain other options, futures and forward
contracts entered into by an Underlying Fund are generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each Section 1256 position held by an
Underlying Fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the Underlying Fund's fiscal year
(and on other dates as prescribed by the Code), and all gain or loss associated
with fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by Section 988 of the Code) will
generally be treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. Even though marked-to-market, gains and losses realized on
certain foreign currency and foreign security investments will generally be
treated as ordinary income. The effect of Section 1256 mark-to-market rules may
be to accelerate income or to convert what otherwise would have been long-term
capital gains into short-term capital gains or short-term capital losses into
long-capital losses within the Underlying Fund. The acceleration of income on
Section 1256 positions may require the Underlying Fund to accrue taxable income
without the corresponding receipt of cash. In order to generate cash to satisfy
the distribution requirements of the Code, the Underlying Fund may be required
to dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of the Underlying
Fund shares. The acceleration of income, and the conversion of long-term capital
gains into short-term capital gains, and short-term capital losses into
long-term capital losses within the Underlying Fund will have a direct impact on
its distributions to a Fund, and in this way may directly affect the amount,
character and timing of income distributed to you by a Fund.
When an Underlying Fund holds an option or contract which substantially
diminishes its risk of loss with respect to another position of the Underlying
Fund (as might occur in some hedging transactions), this combination of
positions could be treated as a "straddle" for tax purposes, possibly resulting
in deferral of losses, adjustments in the holding periods and conversion of
short-term capital losses into long-term capital losses. The Underlying Fund may
make certain tax elections for mixed straddles (i.e., straddles comprised of at
least one Section 1256 position and at least one non-Section 1256 position)
which may reduce or eliminate the operation of these straddle rules.
In order to retain its status as a regulated investment company, an Underlying
Fund must also meet the requirement that less than 30% of its annual gross
income be derived from the sale or other disposition of securities and certain
other investments held for less than three months (short-short gains). This
requirement may limit the Underlying Fund's ability to engage in options,
straddles, hedging transactions and forward or futures contracts. These
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities, reduce the holding periods of certain
securities within the Underlying Fund, resulting in additional short-short
income for such Underlying Fund. Each Underlying Fund will monitor its
transactions in such options, straddles, hedging transactions, forward and
futures contracts and similar securities, and may make certain other tax
elections in order to ensure continued qualification as a regulated investment
company, and to mitigate the effect of the above rules.
Distributions paid to a Fund by an Underlying Fund out of ordinary income and
short-term capital gains arising from the Underlying Fund's investments,
including investments in options, forwards, and futures contracts, will be
taxable to the Fund as ordinary income. This income will become part of the
Fund's net investment income, and, as such, will available for distribution to
you as an ordinary income dividend.
8. INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES.
Many of the Underlying Funds in which a Fund is authorized to invest may also
invest in foreign securities. Such investments, if made, will have the following
additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time an Underlying Fund accrues income
(including dividends) or other receivables, or accrues expenses or other
liabilities, and the time the Underlying Fund actually collects such receivables
or pays such liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on the disposition of debt securities denominated in a foreign
currency and on the disposition of certain options, futures, forward contracts,
and possibly other financial derivative contracts, gain or loss attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of its disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Underlying Fund's investment company taxable income, which, in turn, will affect
the amount of income to be distributed to you by the Funds.
If an Underlying Fund's Section 988 losses exceed such Underlying Fund's other
net investment income during a taxable year, the Underlying Fund generally will
not be able to make ordinary dividend distributions to the Funds for that year.
However, if distributions were made before the losses were realized, these
distributions will be recharacterized as return of capital distributions for
federal income tax purposes, rather than as ordinary dividend or capital gain
distributions. The receipt of a return of capital distribution by one or more of
the Funds may cause a portion of its distributions to you to be treated as a
return of capital. In that event, your tax basis in your Fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your Fund shares will be treated as capital
gain to you.
As stated above, at least 90% of each Underlying Fund's income for each taxable
year must consist of "qualifying income." Foreign currency gains derived by the
Underlying Fund in the course of its investment activities generally will
constitute qualifying income for purposes of this requirement. Similarly, such
gains generally will not constitute "short-short" gains as described above
unless such gains are deemed not to be directly related to the Underlying Fund's
principal business of investing in stocks, other securities, and related
options, futures and forward contracts. All of the Franklin Templeton funds
investing in foreign securities intend to comply with the qualifying income and
short-short requirements, and, therefore, will monitor their foreign currency
gains and losses with a view to satisfying these tests.
Many Underlying Funds are also permitted to engage in certain interest rate and
foreign currency swaps. The federal income tax treatment of these investments is
unclear in certain respects. The interest income and foreign currency gains
realized on such investments, may, in some circumstances, result in the
realization of income not qualifying under the 90% income test, or may be deemed
to be derived from the disposition of securities held less than three months in
determining such Underlying Fund's compliance with the short-short test. To the
extent that an Underlying Fund invests in interest rate and currency swap
transactions, it will limit its investments to the extent necessary to comply
with the qualifying income and short-short requirements.
An Underlying Fund may also be subject to foreign withholding taxes on income
from certain of its foreign securities. Because 50% or more of the total assets
of each Fund at the end of its fiscal year will generally be invested in other
regulated investment companies rather than in securities of foreign
corporations, the Funds will generally not be allowed to elect to pass-through
to you your pro rata share of foreign taxes paid by the Underlying Funds.
Instead, the Fund will deduct its share of any foreign taxes paid in computing
its net investment income and the income distributed to you will be net of any
foreign taxes paid by the Underlying Funds.
9. INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES.
The Underlying Funds may also invest in shares of foreign corporations which may
be classified under the Code as Passive Foreign Investment Companies ("PFICs").
In general, a foreign corporation is classified as a PFIC if at least one-half
of its assets constitute investment-type assets or 75% or more of its gross
income is investment-type income.
If an Underlying Fund receives an "excess distribution" with respect to PFIC
stock, the Underlying Fund itself may be subject to a U.S. federal income tax on
a portion of the distribution, whether or not the corresponding income is
distributed by the Underlying Fund. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Underlying Fund held the PFIC shares. The Underlying Fund will be
subject to tax on the portion, if any, of an excess distribution that is
allocated to prior taxable years, and an interest factor will be added to the
tax, as if the tax had been payable in such prior taxable years. In this case,
neither the Fund nor you would be permitted to claim a credit on its or your tax
return for the tax paid by the Underlying Fund. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing the
Underlying Fund's distributions to the Funds that are treated as ordinary
dividends rather than long-term capital gain dividends.
The Underlying Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in many
circumstances, the Underlying Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current basis, regardless
of whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, another election may
become available that would involve marking-to-market the Underlying Fund's PFIC
shares at the end of each taxable year (and on certain other dates as prescribed
in the Code), with the result that unrealized gains would be treated as though
they were realized. If this election were made, tax at the Underlying Fund level
under the PFIC rules would generally be eliminated. The Underlying Funds'
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC shares.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Underlying Fund (if any), the amount of income or gains
distributed or deemed distributed by the Underlying Fund to the Funds, the
amount of income or gains distributed to you by a Fund, and the timing and
character of these distributions.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Underlying Fund acquires shares in that corporation.
While Franklin Templeton Funds will generally seek to avoid investing in PFIC
shares to avoid the tax consequences detailed above, there are no guarantees
that they will be able to do so, and all Franklin Templeton Funds reserve the
right to make such investments as a matter of their fundamental investment
policy.
10. CONVERSION TRANSACTIONS.
Gains realized by an Underlying Fund from transactions that are deemed to be
"conversion transactions" under the Code, and that would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined as the "applicable imputed income
amount". A conversion transaction is any transaction in which substantially all
of an Underlying Fund's expected return is attributable to the time value of its
net investment in such transaction, and any one of the following criteria are
met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Underlying Fund on the basis that
it would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated in the
future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs. Application of these
conversion transaction rules at the Underlying Fund level may have an effect on
the amount and character of income realized by one or more of the Funds, and
distributed to you.
11. STRIPPED PREFERRED STOCK.
Occasionally, an Underlying Fund may purchase "stripped preferred stock", that
is subject to special tax treatment. Stripped preferred stock is defined as
certain preferred stock issues where ownership of the stock has been separated
from the right to receive dividends that have not yet become payable. The stock
must have a fixed redemption price, must not participate substantially in the
growth of the issuer, and must be limited and preferred as to dividends. The
difference between the redemption price and purchase price is taken into the
Underlying Fund's income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal. Application of these rules at the Underlying Fund level may have an
effect on the amount and timing of income realized by one or more of the Funds,
and distributed to you.
12. ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) TRANSACTIONS.
Any Underlying Fund's investments in zero coupon bonds, bonds issued or acquired
at a discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause it to recognize income prior to its receipt of
cash payments. Zero coupon and delayed interest bonds are normally issued at a
discount and are therefore generally subject to tax reporting as original issue
discount ("OID") obligations. The Underlying Fund is required to accrue as
income a portion of the discount at which these securities were issued, and to
distribute such income each year (as ordinary dividends) in order to maintain
its qualification as a regulated investment company and to avoid income and
excise taxes at the fund level. PIK bonds are subject to similar tax rules
concerning the amount, character and timing of income required to be accrued by
the Underlying Fund. Bonds acquired in the secondary market for a price less
than their revised or adjusted issue price are said to have been acquired with
market discount. For these bonds, the Underlying Fund may elect to accrue market
discount on a current basis, in which case the Underlying Fund will be required
to distribute any such accrued discount. If the Underlying Fund does not elect
to accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation. Application of these rules at the
Underlying Fund level may have an effect on the amount and timing of income
realized by one or more of the Funds, and distributed to you.
13. DEFAULTED OBLIGATIONS.
An Underlying Fund may be required to accrue income on defaulted obligations and
to distribute such income to one or more of the Funds even though it is not
currently receiving interest or principal payments on such obligations. In order
to generate cash to satisfy these distribution requirements, the Underlying Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
the Underlying Fund's shares.
FOR MORE INFORMATION ABOUT THE TAXATION OF EITHER THE UNDERLYING FUNDS OR THE
FUNDS' INVESTMENTS, OR OF THE FUNDS' DISTRIBUTIONS TO YOU, PLEASE CONTACT YOUR
PERSONAL TAX ADVISOR.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for both classes of the Fund's
shares. The underwriting agreement will continue in effect for successive annual
periods if its continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities, and in either event by a majority vote of the Board members
who are not parties to the underwriting agreement or interested persons of any
such party (other than as members of the Board), cast in person at a meeting
called for that purpose. The underwriting agreement terminates automatically in
the event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act.
The Class I Plan. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
The Class II Plan. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
The Class I and Class II Plans. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
investment Advisory and Asset Allocation agreement with Advisers, or by vote of
a majority of the outstanding shares of the class. Distributors or any dealer or
other firm may also terminate their respective distribution or service agreement
at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance for each class follows. Regardless of
the method used, past performance does not guarantee future results, and is an
indication of the return to shareholders only for the limited historical period
used.
TOTAL RETURN
Average Annual Total Return. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions are reinvested at
Net Asset Value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
The average annual rates of return for the Fund will be calculated according to
the SEC formula:
P(1+T)n = 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 the one-, five- or ten-year periods at the end of the one-, five-
or ten- year periods (or fractional portion thereof)
Cumulative Total Return. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods, or fractional portion
thereof.
YIELD
Current Yield. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class 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 of
the class during the base period.
Current yield figures will be obtained using the following SEC formula:
Yield = 2 [(a-b + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the 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 of a
class. 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 by a class 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.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk adjusted performance of a fund over specified
time periods relative to other funds within its category.
o) Salomon Brothers Broad Investment Grade Index or its component indices
measures yield, price, and total return for Treasury, agency, corporate and
mortgage bonds.
p) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
q) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return or the municipal bond market.
r) SB World Government Bond Index or its components indices:
The Index covers the available market for domestic Government bonds. It contains
an all-inclusive universe of institutionally traded bonds. The Index is designed
to measure the yield, price, and total return of domestic Government bond
markets.
s) SB Mortgage Index:
Measures price, yield and total return of Mortgage backed securities.
t) SB World Money Market Index:
Approximates the performance of money market instruments of the following eight
currencies both in domestic and Euromarkets: Canadian Dollar, Deutchsmark, Dutch
Guilder, French Franc, Japanese Yen, Swiss France, U.K. Sterling and U.S.
Dollar.
u) Salomon Brothers Composite High Yield Index or its component indices:
measures yield, price, and total return of much of the below-investment grade
U.S. corporate bond market.
v) Federal Reserve H15 publication: Measures yields for Constant Maturity
treasury instruments.
w) The Goldman Sachs Convertible 100 Bond Index: Measures yield, price, and
total return of Convertible Bonds.
x) CD Rates: Published by the Wall Street Journal, measures yields of
Certificates of Deposit from Major New York Banks.
y) CS First Boston High Yield Index: Is an unmanaged, trader priced portfolio
which measures total yield, price & total return of the high yield debt market.
z) Payden & Rygel 90 Day T-Bill Index: Measures total return of a Constant
Maturity 90 day T-Bill.
aa) IBC Money Market Insight: Measures yield and return and assets of money
market funds.
bb) Bond Buyer 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
cc) Bond Buyer 30-Bond Index - an index of municipal bond yields based upon
yields of 20 revenue bonds maturing in 30 years.
dd) Bond Buyer 40-Bond Index - an index of municipal bond yields based upon
yields of 40 revenue bonds maturing in roughly 29-30 years.
ee) J. P. Morgan Emerging Markets Bond Index + or its component indices: tracks
yield, price, and total return for traded external debt instruments in the
emerging markets. Included are U.S. dollar and other
external-currency-denominated Brady bonds, loans, Eurobond, and local markets
instruments.
ff) J. P. Morgan Global Bond Index or its component indices: tracks yield,
price, and total return for the traded sovereign issues of 13 international
markets, the 13 markets measured are Australia, Belgium, Canada, Denmark,
France, Germany, Italy, Japan, Netherlands, Spain, Sweden, U.K. and the U.S.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 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 Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $152
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 124 U.S. based open-end investment management companies to the public.
The Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past eight years.
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. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of either class.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
Summary of Code of Ethics. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
USEFUL TERMS AND DEFINITIONS
1933 Act - Securities Act of 1933, as amended
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - The Fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
Franklin Funds - The mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Letter - Letter of Intent
Moody's - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
Prospectus - The prospectus for the Fund dated December 31, 1996, as may be
amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, 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.
Templeton Funds - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
Financial Statements
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Franklin Templeton Fund Allocator Series:
We have audited the accompany statements of assets and liabilities of the three
funds comprising the Franklin Templeton Fund Allocator Series (the Trust) as of
December 20, 1996. The financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurances about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by managment, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the three funds
comprising the Franklin Templeton Fund Allocator Seres as of December 20, 1996,
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 20, 1996
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 20, 1996
Franklin Templeton Franklin Templeton Franklin Templeton
Conservative Target Moderate Target Growth Target
Assets: Fund Fund Fund
------------------- ------------------ ----------------
<S> <C> <C> <C>
Cash held by custodian $ 40,000 $ 40,000 $ 40,000
Unamortized organization costs 68,333 68,333 68,333
Unamortized offering costs 40,265 40,265 40,265
------------------- ------------------ ----------------
Total assets 148,598 148,598 148,598
------------------- ------------------ ----------------
Liabilities:
Accrued expenses for organization costs 68,333 68,333 68,333
Accrued expenses for offering costs 40,265 40,265 40,265
------------------- ------------------ ----------------
Total liabilities 108,598 108,598 108,598
------------------- ------------------ ----------------
Net assets $ 40,000 $ 40,000 $ 40,000
=================== ================== ================
Computation of net asset value and offering
price per share for Class I & Class II:
Class I
Net assets, at value $ 20,000 $ 20,000 $ 20,000
=================== ================== ================
Shares outstanding 2,000 2,000 2,000
=================== ================== ================
Net asset value per share $ 10.00 $ 10.00 $ 10.00
=================== ================== ================
Maximum offering price per share $ 10.47 $ 10.47 $ 10.47
=================== ================== ================
(100/95.5 of $10.00)
Class II
Net assets, at value $ 20,000 $ 20,000 $ 20,000
=================== ================== ================
Shares outstanding 2,000 2,000 2,000
=================== ================== ================
Net asset value per share $ 10.00 $ 10.00 $ 10.00
=================== ================== ================
Maximum offering price per share $ 10.10 $ 10.10 $ 10.10
=================== ================== ================
(100/99 of $10.00)
Note: Franklin Templeton Conservative Target Fund, Franklin Templeton Moderate
Target Fund, and Franklin Templeton Growth Target Fund ("the Funds") are
open-end, non diversified funds of the Franklin Templeton Fund Allocator Series,
a management investment company registered under the Investment Company Act of
1940 and organized as a Delaware business trust on October 2, 1995. Organization
expenses are being amortized over a five-year period and offering expenses are
being amortized over a one-year period from the effective date of their
registration under the Securities Act of 1933. As part of their organization,
the Funds have issued, in a private placement, 2,000 shares of class I and II,
respectively, of beneficial interest to Franklin Resources, Inc., at $10.00 per
share. These shares have been designated as "initial shares".
</TABLE>
Franklin Templeton Fund Allocator Series
FORM N-1A
Part C
Other Information
Item 24 Financial Statements and Exhibits
a) Financial Statements
(1) Filed in Part B
Report of Independent Auditors
Statement of Assets and Liabilities as of December 20, 1996
Note to Statement of Assets and Liabilities
(b) Exhibits:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated
September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(ii) Certificate of Amendment of Agreement and
Declaration of Trust of Franklin Templeton Fund
Manager dated September 17, 1996
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(iii) Certificate of Trust dated September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(iv) Certificate of Amendment to the Certificate of
Trust of Franklin Templeton Fund Manager dated
September 17, 1996
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Investment Advisory and Asset Allocation Agreement
between Registrant and Franklin Advisers, Inc., dated
November 19, 1996
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc., dated
November 19, 1996
(ii) Forms of Dealer Agreements between
Franklin/Templeton Distributors, Inc. and dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
(ii) Copy of Custodian Agreement between Registrant
and Citibank Delaware:
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master
Agreement
3. Short Form Bank Agreement - Deposits and
Disbursements of Funds
Registrant: Franklin Asset Allocation Fund
Filing: Post-Effective Amendment No. 56 to
Registration Statement on Form N-1A
File No. 2-12647
Filing Date: May 17, 1996
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
(i) Administration Agreement between Registrant and Franklin
Templeton Services, Inc., dated November 19, 1996
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
(i) Opinion and Consent of Counsel dated December 20, 1996
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors dated December 20, 1996
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Subscription Agreement between Registrant and Franklin
Resources, Inc., dated December 19, 1996
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Copy of Model Retirement Plan is Incorporated
herein by reference to:
Registrant: AGE High Income Fund, Inc.
Filing: Post-effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Class I Distribution Plan pursuant to Rule 12b-1
between Registrant and Franklin/Templeton Distributors, Inc.
dated December 31, 1996
(ii) Class II Distribution Plan pursuant to Rule 12b-1
between Registrant and Franklin/Templeton Distributors, Inc.
dated December 31, 1996
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not be
audited)
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(ii) Certificate of Secretary September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(18) Copies of any plan entered into by registrant pursuant to Rule
18f-3 under the 1940 Act
(i) Multiple Class Plan dated November 19, 1996
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
Not Applicable
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF 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 Group of Funds(R).
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 Funds' Investment Manager (SEC File 801-26292), incorporated herein by
reference, which sets forth the officers and directors of the Investment Manager
and information as to any business, profession, vocation or employment of a
substantial nature engaged in by those officers and directors during the past
two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
AGE High Income Fund, Inc.
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 Gold Fund
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S. Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Securities Fund
Templeton Global Smaller Companies Growth Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
c) Not Applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA. 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
a) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A including the required information in the Fund's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
b) The Registrant hereby undertakes to promptly call a meeting of Shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not less
than 10 per cent of the Registrant's outstanding shares and to assist its
shareholders in the communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940.
c) The Registrant hereby undertakes to file a post-effective amendment using
financial statements which need not be certified, within four to six months from
the effective date of Registrant's Registration Statement under the Securities
Act of 1933.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment
No. 2 to 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 26th day of December, 1996.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
(Registrant)
By: Donald P. Gould*
--------------------------
Donald P. Gould, President
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
Donald P. Gould* Trustee and Principal
(Donald P. Gould) Executive Officer
Dated: December 26, 1996
Martin L. Flanagan* Principal Financial Officer
(Martin L. Flanagan) Dated: December 26, 1996
Diomedes Loo-Tam* Principal Accounting Officer
(Diomedes Loo-Tam) Dated: December 26, 1996
Frank H. Abbott III* Trustee
(Frank H. Abbott III) Dated: December 26, 1996
Harris J. Ashton* Trustee
(Harris J. Ashton) Dated: December 26, 1996
S. Joseph Fortunato* Trustee
(S. Joseph Fortunato) Dated: December 26, 1996
David W. Garbellano* Trustee
(David W. Garbellano) Dated: December 26, 1996
Charles B. Johnson* Trustee
(Charles B. Johnson) Dated: December 26, 1996
Rupert H. Johnson, Jr.* Trustee
(Rupert H. Johnson, Jr.) Dated: December 26, 1996
Frank W.T. LaHaye* Trustee
(Frank W.T. LaHaye) Dated: December 26, 1996
Gordon S. Macklin* Trustee
(Gordon S. Macklin) Dated: December 26, 1996
*By: /s/ Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
REGISTRATION STATEMENT
EXHIBIT INDEX
Page No. In
Sequential
Numbering
Exhibit No. Description System
EX-99.B1(i) Agreement and Declaration of Trust *
dated September 18, 1995
EX-99.B1(ii) Certificate of Amendment of Agreement *
and Declaration of Trust of Franklin
Templeton Fund Manager dated
September 17, 1996
EX-99.B1(iii) Certificate of Trust dated *
September 18, 1995
EX-99.B1(iv) Certificate of Amendment to the *
Certificate of Trust of Franklin
Templeton Fund Manager dated
September 17, 1996
EX-99.B2(i) By-Laws *
EX-99.B5(i) Investment Advisory and Asset Attached
Allocation Agreement between
Registrant and Franklin Advisers,
Inc., dated November 19, 1996
EX-99.B6(i) Distribution Agreement between Attached
Registrant and Franklin/Templeton
Distributors, Inc., dated November 19,
1996
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.
and dealers
EX-99.B8(i) Master Custody Agreement between Attached
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(ii) Copy of Custodian Agreement between *
Registrant and Citibank Delaware:
EX-99.B9(i) Administration Agreement between Attached
Registrant and Franklin Templeton
Services, Inc., dated November 19,
1996
EX-99.B10(i) Opinion and Consent of Counsel dated Attached
December 20, 1996
EX-99.B11(i) Consent of Independent Auditors Attached
dated December 20, 1996
EX-99.B13(i) Subscription Agreement between Attached
Registrant and Franklin Resources,
Inc., dated December 19, 1996
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Class I Distribution Plan Attached
pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton
Distributors, Inc., dated December 31,
1996
EX-99.B15(ii) Class II Distribution Plan Attached
pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton
Distributors, Inc., dated December 31,
1996
EX-99.B17(i) Power of Attorney dated September 18, *
1995
EX-99.B17(ii) Certificate of Secretary dated *
September 18, 1995
EX-99.B18(i) Multiple Class Plan dated
November 19, 1996 Attached
* INCORPORATED BY REFERENCE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
on behalf of its series
Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
INVESTMENT ADVISORY and ASSET ALLOCATION AGREEMENT
This INVESTMENT ADVISORY and ASSET ALLOCATION AGREEMENT ("Agreement") made
between FRANKLIN TEMPLETON FUND ALLOCATOR SERIES, a Delaware business trust (the
"Trust"), on behalf of each of its series named above (the "Funds"), and
FRANKLIN ADVISERS, INC., a California corporation, (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment manager and to have an investment manager perform
various management, statistical, research, investment advisory and other
services for the Funds; and,
WHEREAS, the investment policies of each Fund contemplate that the Fund
seek to achieve its investment objectives through investment of the Fund's
assets in a number of asset classes and, consequently, each Fund will require
the provision of asset allocation services, as well as traditional investment
advisory services; and
WHEREAS, each Fund currently intends to invest its assets primarily in one
or more available investment companies in the Franklin Templeton Group of Funds,
although each Fund is also permitted to and may invest some or all of its assets
directly in non-investment company securities; and
WHEREAS, the parties hereto have agreed to the respective fees for asset
allocation and investment advisory services as described below; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering asset
allocation, investment advisory, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to the Funds.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is mutually agreed as follows:
l. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
provide asset allocation services to the Funds, to manage the investment and
reinvestment of the Funds' assets in investment company and non-investment
company securities and to administer certain aspects of their affairs, subject
to the direction of the Board of Trustees and the officers of the Trust, for the
period and on the terms hereinafter set forth. The Adviser hereby accepts such
employment and agrees during such period to render the services and to assume
the obligations herein set forth for the compensation herein provided. The
Adviser shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized (whether herein or
otherwise), have no authority to act for or represent the Funds or the Trust in
any way or otherwise be deemed an agent of the Funds or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The Adviser
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. ASSET ALLOCATION SERVICES. The Adviser shall, subject to and in
accordance with the investment objectives and policies of each Fund and any
directions which the Trust's Board may issue from time to time, (i) manage
the allocation of each Fund's assets as between different asset classes,
which may include but are not be limited to domestic equity, international,
fixed income, gold and cash; and (ii) consistent with those allocation
decisions, select the amount, if any, to be invested by each Fund in either
the Franklin Templeton Funds available for purchase by such Funds to it or
such other securities as are consistent with each Fund's investment
objectives and policies.
B. INVESTMENT ADVISORY SERVICES. The Adviser shall manage each Fund's
assets subject to and in accordance with the investment objectives and
policies of each Fund and any directions which the Trust's Board may issue
from time to time. In pursuance of the foregoing, the Adviser shall make
all determinations with respect to the investment of each Fund's assets and
the purchase and sale of its investment securities, and shall take such
steps as may be necessary to implement the same.
C. This subsection 2.C applies only to any assets of the Funds which
are not invested in investment company securities.
(a) The Adviser, subject to and in accordance with any directions
which the Board may issue from time to time, shall place, in the name
of each Fund, orders for the execution of each Fund's securities
transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for each Fund, but this
requirement shall not be deemed to obligate the Adviser to place any
order solely on the basis of obtaining the lowest commission rate if
the other standards set forth in this section have been satisfied. The
parties recognize that there are likely to be many cases in which
different brokers are equally able to provide such best price and
execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish
research, statistical, quotations and other information to one or more
Funds and the Adviser in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so
and so long as the Board determines that the affected Funds will
benefit, directly or indirectly, by doing so, the Adviser may place
orders with a broker who charges a commission for that transaction
which is in excess of the amount of commission that another broker
would have charged for effecting that transaction, provided that the
excess commission is reasonable in relation to the value of "brokerage
and research services" (as defined in Section 28(e) (3) of the
Securities Exchange Act of 1934) provided by that broker.
Accordingly, the Trust and the Adviser agree that the Adviser
shall select brokers for the execution of each Fund's transactions
from among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the quotations
necessary to determine the Fund's net assets, in such amount of
total brokerage as may reasonably be required in light of such
services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its affiliates which
the Adviser or its affiliates may lawfully and appropriately use
in their investment advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or which place the
Adviser in a better position to make decisions in connection with
the management of the Fund's assets and securities, whether or
not such data may also be useful to the Adviser and its
affiliates in managing other portfolios or advising other
clients, in such amount of total brokerage as may reasonably be
required. Provided that the Trust's officers are satisfied that
the best execution is obtained, the sale of shares of the Fund
may also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
(b) When the Adviser has determined that a Fund should tender
securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be
designated as the "tendering dealer" so long as it is legally
permitted to act in such capacity under the federal securities laws
and rules thereunder and the rules of any securities exchange or
association of which Distributors may be a member. Neither the Adviser
nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other
than normal periodic fees or payments necessary to maintain its
corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This
Agreement shall not obligate the Adviser or Distributors (i) to act
pursuant to the foregoing requirement under any circumstances in which
they might reasonably believe that liability might be imposed upon
them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from
others to it as a result of such a tender, unless the Trust on behalf
of the affected Fund shall enter into an agreement with the Adviser
and/or Distributors to reimburse them for all such expenses connected
with attempting to collect such fees, including legal fees and
expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect
such fees.
(c) The Adviser shall render regular reports to the Trust, not
more frequently than quarterly, of how much total brokerage business
has been placed by the Adviser, on behalf of each Fund, with brokers
falling into each of the categories referred to above and the manner
in which the allocation has been accomplished.
(d) The Adviser agrees that no investment decision will be made
or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such
allocation of brokerage shall not interfere with the Adviser's
paramount duty to obtain the best net price and execution for each
Fund.
D. This subsection 2.D applies to any assets of the Funds which are
invested in investment company securities. Orders for the purchase or sale
of investment company securities shall be placed directly with
Franklin/Templeton Distributors, Inc.
E. The Adviser shall render or cause to be rendered regular reports to
the Trust, at regular meetings of its Board and at such other times as may
be reasonably requested by the Board, of (i) decisions made with respect to
the allocation of each Fund's assets; (ii) to the extent each Fund's assets
are invested in investment companies in the Franklin Templeton Group of
Funds, decisions made with respect to purchases and sales of such funds
within the specific asset classes; (iii) to the extent that any portion of
a Fund's assets is invested directly in non-investment company securities,
decisions made with respect to purchase and sale of non-investment company
securities; (iv) the reasons for such decisions; and (v) the extent to
which those decisions have been implemented.
F. The Adviser shall be responsible for determining the manner in
which any voting rights, rights to consent to corporate action and any
other rights pertaining to each Fund's investment company and
non-investment company securities shall be exercised.
G. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES
REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser, its
officers and employees will make available and provide accounting and
statistical information required by each Fund in the preparation of
registration statements, reports and other documents required by federal
and state securities laws and with such information as the Fund may
reasonably request for use in the preparation of such documents or of other
materials necessary or helpful for the underwriting and distribution of the
Fund's shares.
H. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its officers
and employees available to the Board and officers of the Trust for
consultation and discussions regarding the administration and management of
each Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that each Fund will pay all of
its own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include, without limitation:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of fund administration, including without limitation
fees paid pursuant to the Fund's contract with Franklin Templeton
Services, Inc. or fees paid to any other entity which provides similar
services to the Fund in the future;
C. Expenses of all audits by independent public accountants;
D. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including
the expenses of issue, repurchase or redemption of its shares;
E. Expenses of obtaining quotations for calculating the value of
the Fund's net assets;
F. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of
the Adviser or its affiliates;
G. Taxes levied against the Fund;
H. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Fund;
I. Costs, including the interest expense, of borrowing money;
J. Costs incident to meetings of the Board and shareholders of
the Fund, reports to the Fund's shareholders, the filing of reports
with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
K. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for
sale;
L. Board members' fees and expenses to Board members who are not
directors, officers, employees or stockholders of the Adviser or any
of its affiliates;
M. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any
applicable state laws; including the printing and mailing of
prospectuses to its shareholders;
N. Trade association dues; and
O. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. COMPENSATION OF THE ADVISER. The Adviser shall receive no fee for any
services under this Agreement, except for the Asset Allocation Services
described in subsection 2.A., above. Each Fund shall pay an asset allocation fee
in cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for asset allocation
services rendered assumed by the Adviser, during the preceding month, on the
first business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets
of each Fund shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of
the net asset value of its shares, all as set forth more fully in the
Fund's current prospectus and statement of additional information. The rate
of the asset allocation fee payable by the Fund shall be calculated daily
at the following annual rates:
0.25% of the Fund's average daily net assets
B. The fee payable by a Fund shall be reduced or eliminated to the
extent that Distributors has actually received cash payments of tender
offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the
limitations on expenses which may be borne by the Fund as set forth in the
laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. The Adviser may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Adviser shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee, or any limitation of a Fund's expenses, as if such waiver or
limitation were fully set forth herein.
C. If this Agreement is terminated prior to the end of any month, the
accrued asset allocation fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to each Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust or Articles of
Incorporation of the Trust, the By-Laws of the Trust, and Section 10(a) of the
1940 Act, it is understood that Board members, officers, agents and shareholders
of the Trust are or may be interested in the Adviser or its affiliates as
directors, officers, agents or stockholders; that directors, officers, agents or
stockholders of the Adviser or its affiliates are or may be interested in the
Trust as Board members, officers, agents, shareholders or otherwise; that the
Adviser or its affiliates may be interested in each Fund as shareholders or
otherwise; and that the effect of any such interests shall be governed by said
Agreement and Declaration of Trust or Articles of Incorporation, By-Laws and the
1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder on the part of the
Adviser, the Adviser shall not be subject to liability to the Trust or any
Fund or to any shareholder of any Fund for any act or omission in the
course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any
security by any Fund.
B. Notwithstanding the foregoing, the Adviser agrees to reimburse the
Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of
factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Adviser or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to
any transactions or proposed transaction in the stock or control of the
Adviser or its affiliates (or litigation related to any pending or proposed
or future transaction in such shares or control) which shall have been
undertaken without the prior, express approval of the Board; or, (ii) is
within the control of the Adviser or any of its affiliates or any of their
officers, directors, employees or stockholders. The Adviser shall not be
obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Adviser or any of its affiliates from the sale of his
shares of the Adviser, or similar matters. So long as this Agreement is in
effect, the Adviser shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Adviser therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against
the Adviser or others for costs, expenses or damages heretofore incurred by
the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
Board member or officer of the Trust, or director or officer of the
Adviser, from liability in violation of Sections 17(h) and (i) of the 1940
Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written below and
shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter
for periods not exceeding one (1) year so long as such continuation is
approved at least annually (i) by a vote of a majority of the outstanding
voting securities of each Fund or by a vote of the Board, and (ii) by a
vote of a majority of the Board members who are not parties to the
Agreement (other than as Board members), cast in person at a meeting called
for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated as to a Fund without the
payment of any penalty either by vote of the Board or by vote of a
majority of the outstanding voting securities of the Fund on 60 days'
written notice to the Adviser;
(ii) shall immediately terminate as to a Fund with respect to the
Fund in the event of its assignment; and
(iii) may be terminated as to a Fund by the Adviser on 60 days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed
and delivered, or mailed post-paid, to the other party at any office of
such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 19th day of November, 1996.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for our Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales of
its Shares without sales charges consistent with the terms of the then current
prospectus and statement of additional information (hereinafter, collectively,
"prospectus") and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that series and class plus any applicable
percentage of the public offering price as sales commission or as otherwise set
forth in our then current prospectus. On each business day on which the New York
Stock Exchange is open for business, we will furnish you with the net asset
value of the Shares of each available series and class which shall be determined
in accordance with our then effective prospectus. All Shares will be sold in the
manner set forth in our then effective prospectus and statement of additional
information, and in compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under
the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of our Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus, or in
reports to existing shareholders;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred;
(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any
supplements thereto which are necessary to continue to
offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses if the
Amendment or supplement arises from your (including your
"Parent's") activities or Rules and Regulations related to
your activities and those expenses would not otherwise have
been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling our
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund or, if the
Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, and (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.
This Agreement may at any time be terminated by the Fund or by any
series without the payment of any penalty, (i) either by vote of the Board or by
vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company but shall not
supersede or revise any Distribution Plan between the parties adopted pursuant
to Rule 12b-1 under the 1940 Act. This Agreement shall supersede all
Distribution Agreements and Amendments previously in effect between the parties.
As used herein, the terms "Net Asset Value," "Offering Price," "Investment
Company," "Open-End Investment Company," "Assignment," "Principal Underwriter,"
"Interested Person," "Parent," "Affiliated Person," and "Majority of the
Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act
or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
DATED: November 19, 1996
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into as of
February 16, 1996, by and between each Investment Company listed on Exhibit A,
for itself and for each of its Series listed on Exhibit A, and BANK OF NEW YORK,
a New York corporation authorized to do a banking business (the "Custodian").
RECITALS
A. Each Investment Company is an investment company registered under
the Investment Company Act of 1940, as amended (the "Investment Company Act")
that invests and reinvests, for itself or on behalf of its Series, in Domestic
Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment Company
that the Custodian is, a "bank" as that term is defined in Section 2(a)(5) of
the Investment Company Act of 1940, as amended, and is eligible to receive and
maintain custody of investment company assets pursuant to Section 17(f) and Rule
17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and for
each of its Series, desire to provide for the retention of the Custodian as a
custodian of the assets of each Investment Company and each Series, on the terms
and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form of a
Master Custody Agreement for administrative convenience, this Agreement shall
create a separate custody agreement for each Investment Company and for each
Series designated on Exhibit A, as though each Investment Company had separately
executed an identical custody agreement for itself and for each of its Series.
No rights, responsibilities or liabilities of any Investment Company or Series
shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or Managing
General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any day,
other than a Saturday or Sunday, that is not a day on which banking institutions
are authorized or required by law to be closed in The City of New York and, with
respect to Foreign Securities, a London Business Day. "London Business Day"
shall mean any day on which dealings and deposits in U.S. dollars are transacted
in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in Subsection
2.1 hereof.
"Executive Committee" shall mean the executive committee of a Board.
"Foreign Custodian" shall have the meaning provided in Section 4.1
hereof.
"Foreign Securities" shall have the meaning provided in Section 2.1
hereof.
"Foreign Securities Depository" shall have the meaning provided in
Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an Investment
Company, if the Investment Company has no series, or a Series.
"Investment Company" shall mean an entity identified on Exhibit A
under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
"Securities" shall have the meaning provided in Section 2.1 hereof.
"Securities System" shall have the meaning provided in Section 3.1
hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the Investment
Company.
"Subcustodian" shall have the meaning provided in Subsection 3.7
hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting transfer
agent for each Investment Company.
"Writing" shall mean a communication in writing, a communication by
telex, facsimile transmission, bankwire or other teleprocess or electronic
instruction system acceptable to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 Appointment of Custodian. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 Delivery of Assets. Each Investment Company may deliver to the
Custodian Securities and cash owned by the Funds, payments of income, principal
or capital distributions received by the Funds with respect to Securities owned
by the Funds from time to time, and the consideration received by the Funds for
such Shares or other securities of the Funds as may be issued and sold from time
to time. The Custodian shall have no responsibility whatsoever for any property
or assets of the Funds held or received by the Funds and not delivered to the
Custodian pursuant to and in accordance with the terms hereof. All Securities
accepted by the Custodian on behalf of the Funds under the terms of this
Agreement shall be in "street name" or other good delivery form as determined by
the Custodian.
2.3 Subcustodians. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 No Duty to Manage. The Custodian, a Subcustodian or a Foreign
Custodian shall not have any duty or responsibility to manage or recommend
investments of the assets of any Fund held by them or to initiate any purchase,
sale or other investment transaction in the absence of Proper Instructions or
except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS HELD
BY THE CUSTODIAN
3.1 Holding Securities. The Custodian shall hold and physically
segregate from any property owned by the Custodian, for the account of each
Fund, all non-cash property delivered by each Fund to the Custodian hereunder
other than Securities which, pursuant to Subsection 3.8 hereof, are held through
a registered clearing agency, a registered securities depository, the Federal
Reserve's book-entry securities system (referred to herein, individually, as a
"Securities System"), or held by a Subcustodian, Foreign Custodian or in a
Foreign Securities Depository.
3.2 Delivery of Securities. Except as otherwise provided in
Subsection 3.5 hereof, the Custodian, upon receipt of Proper Instructions, shall
release and deliver Securities owned by a Fund and held by the Custodian in the
following cases or as otherwise directed in Proper Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into the
name or nominee name of the Fund, the name or nominee name of the Custodian, the
name or nominee name of any Subcustodian or Foreign Custodian; or for exchange
for a different number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in any such case,
the new Securities are to be delivered to the Custodian, a Subcustodian or
Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, or reorganization of the issuer of such
Securities, or pursuant to a conversion of such Securities; provided that, in
any such case, the new Securities and cash, if any, are to be delivered to the
Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that, in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
Fund, specifying the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities held by the Custodian, a
Subcustodian or a Foreign Custodian (other than bearer Securities) shall be
registered in the name or nominee name of the appropriate Fund, in the name or
nominee name of the Custodian or in the name or nominee name of any Subcustodian
or Foreign Custodian. Each Fund agrees to hold the Custodian, any such nominee,
Subcustodian or Foreign Custodian harmless from any liability as a holder of
record of such Securities.
3.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts for each Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Agreement, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received by it
hereunder from or for the account of each Fund, other than cash maintained by a
Fund in a bank account established and used in accordance with Rule 17f-3 under
the Fund Act. Funds held by the Custodian for a Fund may be deposited by it to
its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 Collection of Income; Trade Settlement; Crediting of Accounts.
The Custodian shall collect income payable with respect to Securities owned by
each Fund, settle Securities trades for the account of each Fund and credit and
debit each Fund's account with the Custodian in connection therewith as stated
in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia of
ownership from the account of the Fund and by making delivery against payment,
and shall credit the account of the Fund with the amount of such proceeds on the
contractual settlement date. If the purchaser or the purchasing broker fails to
make payment within a reasonable period of time, the Custodian shall notify the
Fund, debit the Fund's account for any amounts previously credited to it by the
Custodian as proceeds of the transaction and, if delivery has not been made,
redeposit the Security into the account of the Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received by
the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant to
the provisions of Subsection 3.2(j) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the Fund
with such income or other amounts payable with respect to Securities owned by
the Fund (other than Securities loaned by the Fund pursuant to Subsection 3.2(j)
hereof) and the Custodian subsequently is unable to collect such income or other
amounts from the payors thereof within a reasonable time period, as determined
by the Custodian in its sole discretion. In such event, the Custodian shall be
entitled to reimbursement of the amount so credited to the account of the Fund.
3.6 Payment of Fund Monies. Upon receipt of Proper Instructions
the Custodian shall pay out monies of a Fund in the following cases or as
otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection 3.8
hereof; or (iii) in the case of repurchase agreements entered into between the
Fund and the Custodian, another bank or a broker-dealer (A) against delivery of
the Securities either in certificated form to the Custodian or a Subcustodian or
through an entry crediting the Custodian's account at the appropriate Federal
Reserve Bank with such Securities or (B) against delivery of the confirmation
evidencing purchase by the Fund of Securities owned by the Custodian or such
broker-dealer or other bank along with written evidence of the agreement by the
Custodian or such broker-dealer or other bank to repurchase such Securities from
the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund
as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions
declared by the Board with respect to the Shares.
3.7 Appointment of Subcustodians. The Custodian may appoint BNY
Western Trust Company or, upon receipt of Proper Instructions, another bank or
trust company, which is itself qualified under the Investment Company Act to act
as a custodian (a "Subcustodian"), as the agent of the Custodian to carry out
such of the duties of the Custodian hereunder as a Custodian may from time to
time direct; provided, however, that the appointment of any Subcustodian shall
not relieve the Custodian of its responsibilities or liabilities hereunder.
3.8 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or, upon
receipt of Proper Instructions, in another Securities System provided that such
securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased
for the account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer Domestic Securities sold for the account of the Fund upon (A)
receipt of advice from the Securities System that payment for such securities
has been transferred to the Securities System Account, and (B) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be maintained
for the Fund by the Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund confirmation of the transfer to or
from the account of the Fund in the form of a written advice or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred cash and/or
Securities, including Securities maintained in an account by the Custodian
pursuant to Section 3.8 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Fund held by it and in connection with
transfers of such securities.
3.11 Proxies. The Custodian shall, with respect to the Securities
held hereunder, promptly deliver to each Fund all proxies, all proxy soliciting
materials and all notices relating to such Securities. If the Securities are
registered otherwise than in the name of a Fund or a nominee of a Fund, the
Custodian shall use its best reasonable efforts, consistent with applicable law,
to cause all proxies to be promptly executed by the registered holder of such
Securities in accordance with Proper Instructions.
3.12 Communications Relating to Fund Portfolio Securities. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 Reports by Custodian. The Custodian shall each business day
furnish each Fund with a statement summarizing all transactions and entries for
the account of the Fund for the preceding day. At the end of every month, the
Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the issue owned, the cost of each issue and
the market value of each issue at the end of each month. Such monthly report
shall also contain separate listings of (a) unsettled trades and (b) when-issued
securities. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE
FUNDS HELD OUTSIDE THE UNITED STATES
4.1 Custody Outside the United States. Each Fund authorizes the
Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of its foreign branches, Foreign
Custodians and Foreign Securities Depositories to: (i) "foreign securities", as
defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act, and (ii) cash and
cash equivalents in such amounts as the Custodian or an affected Fund may
determine to be reasonably necessary to effect the Fund's Foreign Securities
transactions.
4.3 Omitted.
4.4 Segregation of Securities. The Custodian shall identify on its
books and records as belonging to the appropriate Fund, the Foreign Securities
of each Fund held by each Foreign Custodian.
4.5 Agreements with Foreign Custodians. Each agreement between the
Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 Access of Independent Accountants of the Funds. Upon request of
a Fund, the Custodian will use its best reasonable efforts to arrange for the
independent accountants or auditors of the Fund to be afforded access to the
books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 Transactions in Foreign Custody Accounts. Upon receipt of Proper
Instructions, the Custodian shall instruct the appropriate Foreign Custodian to
transfer, exchange or deliver Foreign Securities owned by a Fund, but, except to
the extent explicitly provided herein, only in any of the cases specified in
Subsection 3.2. Upon receipt of Proper Instructions, the Custodian shall pay out
or instruct the appropriate Foreign Custodian to pay out monies of a Fund in any
of the cases specified in Subsection 3.6. Notwithstanding anything herein to the
contrary, settlement and payment for Foreign Securities received for the account
of a Fund and delivery of Foreign Securities maintained for the account of a
Fund may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such securities from such purchaser or dealer.
Foreign Securities maintained in the custody of a Foreign Custodian may be
maintained in the name of such entity or its nominee name to the same extent as
set forth in Section 3.3 of this Agreement and each Fund agrees to hold any
Foreign Custodian and its nominee harmless from any liability as a holder of
record of such securities.
4.8 Liability of Foreign Custodian. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 Monitoring Responsibilities.
(a) The Custodian will promptly inform each Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions" means
instructions of a Fund received by the Custodian via telephone or in Writing
which the Custodian believes in good faith to have been given by Authorized
Persons (as defined below) or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Custodian may specify.
Any Proper Instructions delivered to the Custodian by telephone shall promptly
thereafter be confirmed in accordance with procedures, and limited in subject
matter, as mutually agreed upon by the parties. Unless otherwise expressly
provided, all Proper Instructions shall continue in full force and effect until
canceled or superseded. If the Custodian requires test arrangements,
authentication methods or other security devices to be used with respect to
Proper Instructions, any Proper Instructions given by the Funds thereafter shall
be given and processed in accordance with such terms and conditions for the use
of such arrangements, methods or devices as the Custodian may put into effect
and modify from time to time. The Funds shall safeguard any testkeys,
identification codes or other security devices which the Custodian shall make
available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions
(conveyed by telephone or in Writing), notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have been properly
given or executed by or on behalf of a Fund. The Custodian may receive and
accept a certified copy of a resolution of a Board or Executive Committee as
conclusive evidence (a) of the authority of any person to act in accordance with
such resolution or (b) of any determination or of any action by the Board or
Executive Committee as described in such resolution, and such resolution may be
considered as in full force and effect until receipt by the Custodian of written
notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary information
in its possession (to the extent permissible under applicable law) to the entity
or entities appointed by the appropriate Board to keep the books of account of a
Fund and/or compute the net asset value per Share of the outstanding Shares of a
Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating to its
activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only such
duties as are set forth herein or contained in Proper Instructions and shall use
reasonable care in carrying out such duties. The Custodian shall be liable to a
Fund for any loss which shall occur as the result of the failure of a Foreign
Custodian engaged directly or indirectly by the Custodian to exercise reasonable
care with respect to the safekeeping of securities and other assets of the Fund
to the same extent that the Custodian would be liable to the Fund if the
Custodian itself were holding such securities and other assets. Nothing in this
Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed in
respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 Relationship. Nothing contained in this Agreement shall (i)
create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 Further Assurances. Each party hereto shall furnish to the
other party hereto such instruments and other documents as such other party may
reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 Attorneys' Fees. If any lawsuit or other action or proceeding
relating to this Agreement is brought by a party hereto against the other party
hereto, the prevailing party shall be entitled to recover reasonable attorneys'
fees, costs and disbursements (including allocated costs and disbursements of
in-house counsel), in addition to any other relief to which the prevailing party
may be entitled.
14.4 Notices. Except as otherwise specified herein, each notice or
other communication hereunder shall be in Writing and shall be delivered to the
intended recipient at the following address (or at such other address as the
intended recipient shall have specified in a written notice given to the other
parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 Headings. The underlined headings contained herein are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and both of which, when taken
together, shall constitute one agreement.
14.7 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the laws of the State of New York
(without giving effect to principles of conflict of laws).
14.8 Force Majeure. Notwithstanding the provisions of Section 11
hereof regarding the Custodian's general standard of care, no failure, delay or
default in performance of any obligation hereunder shall constitute an event of
default or a breach of this agreement, or give rise to any liability whatsoever
on the part of one party hereto to the other, to the extent that such failure to
perform, delay or default arises out of a cause beyond the control and without
negligence of the party otherwise chargeable with failure, delay or default;
including, but not limited to: action or inaction of governmental, civil or
military authority; fire; strike; lockout or other labor dispute; flood; war;
riot; theft; earthquake; natural disaster; breakdown of public or common carrier
communications facilities; computer malfunction; or act, negligence or default
of the other party. This paragraph shall in no way limit the right of either
party to this Agreement to make any claim against third parties for any damages
suffered due to such causes.
14.9 Successors and Assigns. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 Waiver. No failure on the part of any person to exercise any
power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 Parties in Interest. None of the provisions of this Agreement
is intended to provide any rights or remedies to any person other than the
Investment Companies, for themselves and for the Funds, and the Custodian and
their respective successors and assigns, if any.
14.14 Pre-Emption of Other Agreements. In the event of any conflict
between this Agreement, including without limitation any amendments hereto, and
any other agreement which may now or in the future exist between the parties,
the provisions of this Agreement shall prevail.
14.15 Variations of Pronouns. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: /s/ illegible
Its: Senior Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: /s/ Harmon E. Burns
Harmon E. Burns
Their: Vice President
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Their: Vice President & Secretary
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Delaware Business Trust U.S. Government Adjustable Rate Mortgage
Portfolios Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income
Trust 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
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income California Corporation
Fund
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin Templeton International Delaware Business Trust Templeton Pacific Growth Fund
Trust Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Gov't
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities
Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income New York Corporation
Fund, Inc.
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Advantaged California Limited
International Bond Fund Partnership
Franklin Tax-Advantaged U.S. California Limited
Government Securities Fund Partnership
Franklin Tax-Advantaged High Yield California Limited
Securities Fund. Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Delaware Business Trust Franklin Real Estate Securities Fund
Trust
Franklin Strategic Mortgage Delaware Business Trust
Portfolio
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free 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 Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin North Carolina Tax-Free Income Fund
(cont.) Trust 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
Franklin Templeton Global Trust Massachusetts Business Franklin Templeton German Government Bond Fund
Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Precious Metals
Fund Real Estate
Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global
Income Securities
Fund Investment
Grade Intermediate
Bond Fund Income
Securities Fund
U.S. Government
Securities Fund
Zero Coupon Fund -
2000 Zero Coupon
Fund - 2005 Zero
Coupon Fund - 2010
Adjustable U.S.
Government Fund
Rising Dividends
Fund Templeton
Pacific Growth Fund
Templeton
International
Equity Fund
Templeton
Developing Markets
Equity Fund
Templeton Global
Growth Fund
Templeton Global
Asset Allocation
Fund Small Cap Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money
Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S.
Government
Securities Fund
Franklin Institutional Adjustable Rate
Securities Fund
Franklin U.S. Government Agency Money Market
Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
- ------------------------------------------------------------------------------------------------------------
</TABLE>
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of November 19, 1996 between FRANKLIN TEMPLETON
FUND ALLOCATOR SERIES, a Delaware business trust ("the Investment Company"), on
behalf of its series, Franklin Templeton Conservative Target Fund, Franklin
Templeton Moderate Target Fund and Franklin Templeton Growth Target Fund (each,
a "Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the parties
hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to Shareholders,
notices of dividends, capital gains distributions and tax credits; and attending
to routine correspondence and other communications with individual Shareholders
when asked to do so by the Fund's shareholder servicing agent or other agents of
the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and the
rules and regulations thereunder, supervising compliance with recordkeeping
requirements imposed by state laws or regulations, and maintaining books and
records for the Fund (other than those maintained by the custodian and transfer
agent);
(h) preparing and filing of tax reports including the Fund's income
tax returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Investment Company's Board of Trustees or
Directors ("Board") or by the Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or any Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate FTS to pay for the services of third parties, including
attorneys, auditors, printers, pricing services or others, engaged directly by
the Fund to perform services on behalf of the Fund.
(2) Neither the Investment Company nor any Fund shall be obligated to pay
FTS any cash consideration hereunder, it being understood that FTS will collect
fees for administrative services from the Franklin Templeton Funds in which each
Fund expects primarily to invest.
(3) This Agreement shall remain in full force and effect through for one
year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any time
on sixty (60) days' written notice without payment of penalty, provided that
such termination by the Investment Company shall be directed or approved by the
vote of a majority of the Board of the Investment Company in office at the time
or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence
on the part of FTS, or of reckless disregard of its duties and obligations
hereunder, FTS shall not be subject to liability for any act or omission in the
course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
Direct Dial: (215) 564-8024
December 20, 1996
Franklin Templeton Fund Allocator Series
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 94403-7777
Re: FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Gentlemen:
We have examined the Agreement and Declaration of Trust of Franklin
Templeton Fund Allocator Series (the "Trust"), a business trust organized under
Delaware law, the By-Laws of the Trust, all as amended to date, as well as the
organizational resolutions adopted by the Board of Trustees of the Trust and
other proceedings of the Trust that we deem material. We have also examined the
Notification of Registration and the Registration Statements filed under the
Investment Company Act of 1940 ("Investment Company Act") and the Securities Act
of 1933 ("Securities Act"), all as amended to date, as well as other items we
deem material to this opinion.
The Trust is authorized by its Agreement and Declaration of Trust to
issue an unlimited number of shares of beneficial interest with a par value of
$0.01. The Agreement and Declaration of Trust authorizes the Board of Trustees
to divide the shares into separate series and separate classes of shares, and
the Board has designated three series of shares, each with two classes which
will be offered to the public -- Franklin Templeton Conservative Target Fund -
Class I and Class II; Franklin Templeton Moderate Target Fund - Class I and
Class II; and Franklin Templeton Growth Target Fund - Class I and Class II.
The Trust has filed with the U.S. Securities and Exchange Commission
("Commission"), a Registration Statement under the Securities Act which
registered an indefinite number of shares of each series of the Trust pursuant
to the provisions of Rule 24f-2 under the Investment Company Act. You have
further advised us that each year hereafter the Trust will timely file a Notice
pursuant to Rule 24f-2, for so long as such Notice is required under the Rule,
perfecting the registration of the shares sold by the Trust during each fiscal
year during which such election to register an indefinite number of shares
remains in effect.
You have also informed us that the shares of the Trust will be sold
in accordance with the Trust's usual method of distributing its registered
shares, under which prospectuses are made available for delivery to offerees and
purchasers of such shares in accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, it is our
opinion that the Trust is a valid and subsisting business trust under the laws
of the State of Delaware, and that the election to register an indefinite number
of shares of the Trust is proper, and such shares of the Trust when issued for
the consideration set by the Board of Trustees pursuant to the Agreement and
Declaration of Trust, and subject to compliance with Rule 24f-2, will be legally
outstanding, fully-paid, and non-assessable shares of beneficial interest in the
Trust, and the holders of such shares will have all the rights provided for with
respect to such holding by the Agreement and Declaration of Trust and the laws
of the State of Delaware.
We hereby consent to the filing of this opinion with the U.S.
Securities and Exchange Commission as an exhibit to the Trust's registration
statement under the Securities Act, and to any reference to use in such
registration statement as legal counsel who have passed upon the legality of the
offering of the Trust's shares of beneficial interest. We also consent to the
filing of this opinion with the securities regulatory agencies of any states or
other jurisdictions in which shares of the Trust are offered for sale.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/ MARK H. PLAFKER
Mark H. Plafker, a Partner
MHP/lbh
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Pre-Effective Amendment No. 2 to the Registration
Statement of Franklin Templeton Fund Allocator Series on Form N-1A (File No.
333-13601) of our report dated December 20, 1996 on our audit of the Statement
of Assets and Liabilities of the Franklin Templeton Fund Alloc ator Series as of
December 20, 1996.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
December 20, 1996
December 19, 1996
Franklin Templeton Fund Allocator Series
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire the shares of beneficial interest (the "Shares") of
each Class ("class") and each series ("Fund") of Franklin Templeton Fund
Allocator Series (the "Trust"), as indicated in the chart below.
Fund and Class #Shares Price/Share Total
------------------------------------------------------------------------
Franklin Templeton 2,000 $10.00 $20,000
Conservative Target Fund -
Class I
Franklin Templeton 2,000 $10.00 $20,000
Conservative Target Fund -
Class II
------------------------------------------------------------------------
Franklin Templeton 2,000 $10.00 $20,000
Moderate Target Fund -
Class I
Franklin Templeton 2,000 $10.00 $20,000
Moderate Target Fund -
Class II
------------------------------------------------------------------------
Franklin Templeton Growth 2,000 $10.00 $20,000
Target Fund - Class I
Franklin Templeton Growth 2,000 $10.00 $20,000
Target Fund - Class II
------------------------------------------------------------------------
Total $120,000
------------------------------------------------------------------------
We will purchase the Shares in a private offering prior to the
effectiveness of the Form N-1A registration statement filed by the Trust under
the Securities Act of 1933. The Shares are being purchased as the initial
advance in connection with the operation of the Funds.
In connection with such purchase, we understand that: (i) we, the
purchaser, intend to acquire the Shares for our own account as the sole
beneficial owner thereof and have no present intention of redeeming or reselling
the Shares so acquired; and (ii) in the event any of the initial Shares are
redeemed during the first five years, each Fund may charge against our
redemption proceeds a pro rata portion of any unamortized organizational
expenses which would be borne by such Shares during the balance of the initial
five-year period were they not to be redeemed.
We consent to the filing of this Investment Letter as an exhibit to the
form N-1A registration statement of the Trust.
Sincerely,
FRANKLIN RESOURCES, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
CLASS I DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
II. Fund: Franklin Templeton Conservative
Target Fund - Class I
Franklin Templeton Moderate
Target Fund - Class I
Franklin Templeton Growth
Target Fund - Class I
PREAMBLE TO DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by FRANKLIN
TEMPLETON FUND ALLOCATOR SERIES ("Trust") for the Class I shares (the "Class")
of each fund named above (each, the "Fund"), which Plan shall take effect on the
date the class I shares of the Fund are first offered (the "Effective Date of
the Plan"). The Plan has been approved by a majority of the Board of Trustees of
the Trust (the "Board"), including a majority of the trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan (the "non-interested board members"), cast
in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Trust on behalf of
the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of the
Underwriting Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that
the compensation of Advisers under the Management Agreement was fair and not
excessive; however, the Board also recognized that uncertainty may exist from
time to time with respect to whether payments to be made by the Fund to
Advisers, Distributors, or others or by Advisers or Distributors to others may
be deemed to constitute distribution expenses. Accordingly, the Board determined
that the Plan should provide for such payments and that adoption of the Plan
would be prudent and in the best interests of the Fund and its shareholders.
Such approval included a determination that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Class, as well as for shareholder services provided for existing shareholders of
the Class. These expenses may include, but are not limited to, the expenses of
the printing of prospectuses and reports used for sales purposes, preparing and
distributing sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of the Class shares. These
expenses may also include any distribution or service fees paid to securities
dealers or their firms or others. Agreements for the payment of service fees to
securities dealers or their firms or others shall be in a form which has been
approved from time to time by the Board, including the non-interested board
members.
2. The maximum amount which may be reimbursed by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.25% per annum of the average
daily net assets of the Class. Said reimbursement shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund is authorized to make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors
or other parties on behalf of the Fund, Advisers or Distributors make payments
that are deemed to be payments by the Fund for the financing of any activity
primarily intended to result in the sale of Class shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year only so
long as such continuance is specifically approved at least annually by a vote of
the Board, including the non-interested board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Trust on behalf of the Fund and
Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent for distribution pursuant
to Paragraph 2 hereof without approval by a majority of the Fund's outstanding
voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested members cast in
person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Trust's
non-interested board members shall be committed to the discretion of such
non-interested board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
DATE: December 31, 1996
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
II. Fund: Franklin Templeton Conservative
Target Fund - Class II
Franklin Templeton Moderate
Target Fund - Class II
Franklin Templeton Growth
Target Fund - Class II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Trustees of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Management Agreement, and of Distributors, under the Underwriting
Agreement, was fair and not excessive. The approval of the Plan included a
determination that in the exercise of their reasonable business judgment and in
light of their fiduciary duties, there is a reasonable likelihood that the Plan
will benefit the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly
to others, an amount not to exceed the above-stated maximum service fee per
annum of the Class' average daily net assets represented by shares of the
Class, as may be determined by the Fund's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from
time to time by the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include,
among other things, assisting in establishing and maintaining customer
accounts and records; assisting with purchase and redemption requests;
arranging for bank wires; monitoring dividend payments from the Fund on
behalf of customers; forwarding certain shareholder communications from the
Fund to customers; receiving and answering correspondence; and aiding in
maintaining the investment of their respective customers in the Class. Any
amounts paid under this paragraph 2(b) shall be paid pursuant to a
servicing or other agreement, which form of agreement has been approved
from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: December 31, 1996
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By: /s/ Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ Harmon E. Burns
Harmon E. Burns
Executive Vice President
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Trustees of the Franklin Templeton Fund Allocator Series (the "Trust"),
on behalf of its series Franklin Templeton Conservative Target Fund, Franklin
Templeton Moderate Target Fund and Franklin Templeton Aggressive Target Fund
(the "Funds"). The Board has determined that the Plan is in the best interests
of each class and the Funds as a whole. The Plan sets forth the provisions
relating to the establishment of multiple classes of shares for the Funds.
1. The Funds shall offer two classes of shares, to be known as Class I
shares and Class II shares.
2. Class I shares shall carry a front-end sales charge ranging from 0%
4.50%, and Class II shares shall carry a front-end sales charge of 1.00%.
3. Class I shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Funds' prospectus.
4. Class II shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Funds' prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or others
for expenses incurred in the promotion and distribution of the shares of Class
I. Such expenses include, but are not limited to, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of the Distributor's
overhead expenses attributable to the distribution of Class shares, as well as
any distribution or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the Funds for the Class, the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two components. The
first component is a shareholder servicing fee, to be paid to broker-dealers,
banks, trust companies and others who will provide personal assistance to
shareholders in servicing their accounts. The second component is an asset-based
sales charge to be retained by the Distributor during the first year after sale
of shares, and, in subsequent years, to be paid to dealers or retained by the
Distributor to be used in the promotion and distribution of Class II shares, in
a manner similar to that described above for (Class I shares.
The Plans shall operate in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, section
26(d).
6. The only difference in expenses as between Class I and Class II shares
shall relate to differences in the Rule 12b-1 plan expenses of each class, as
described in each class' Rule 12b-1 Plan.
7. There shall be no conversion features associated with the Class I and
Class II shares.
8. Shares of either Class may be exchanged for shares of another investment
company within the Franklin Templeton Group of Funds according to the terms and
conditions stated in each fund's prospectus, as it may be amended from time to
time, to the extent permitted by the Investment Company Act of 1940 and the
rules and regulations adopted thereunder.
9. Each Class will vote separately with respect to the Rule 12b-1 Plan
related to that Class.
10. On an ongoing basis, the trustees pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Funds for
the existence of any material conflicts between the interests of the two classes
of shares. The trustees, including a majority of the independent trustees, shall
take such action as is reasonably necessary to eliminate any such conflict that
may develop. Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc.
shall be responsible for alerting the Board to any material conflicts that
arise.
11. All material amendments to this Plan must be approved by a majority of
the trustees of the Funds, including a majority of the trustees who are not
interested persons of the Funds.
I, Deborah R. Gatzek, Secretary of the Franklin Templeton Group of Funds,
do hereby certify that this Multiple Class Plan was adopted by Franklin
Templeton Fund Allocator Series, on behalf of its series, Franklin Templeton
Conservative Target Fund, Franklin Templeton Moderate Target Fund and Franklin
Templeton Aggressive Target Fund, by a majority of the Trustees of the Trust
on November 19, 1996.
/s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
