As filed with the Securities and Exchange Commission on October 7,
1996
File Nos.
811-______
33-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ___
Post-Effective Amendment No. ___
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. ___
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 --- How Taxation
Affects You and the Fund"; "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 and "Miscellaneous Information"
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 and "Investment Advisory, Asset
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
[], 199[]
777 Mariners Island Boulevard,
P. O. Box 7777,
San Mateo, California 94403-7777 1-800/DIAL BEN
Investment Strategy
Franklin Templeton Conservative Target Fund - []
Franklin Templeton Moderate Target Fund - []
Franklin Templeton Aggressive 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's SAI dated ___________________, as may be amended from time to time,
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. You can call the Trust or the Trust's
principal underwriter, Distributors, at the address or telephone number shown
above to obtain a copy of the SAI without charge.
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
TABLE OF CONTENTS
SERIES
ABOUT THE FUND
_________, 1996
Expense Summary..................................
WHEN READING THIS
PROSPECTUS, YOU WILL SEE How Does the Fund Invest Its Assets?.............
CERTAIN TERMS IN CAPITAL
LETTERS. THIS MEANS THE TERM What Are the Fund's Potential Risks?.............
IS EXPLAINED IN OUR GLOSSARY
How Do the Underlying Funds Invest Their Assets?.
What Are the Underlying Funds' Potential Risks?..
Who Manages the Fund?............................
How Does the Fund Measure Performance?...........
How Is the Trust Organized?......................
How Taxation Affects You and the Fund............
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.............................
May I Exchange Shares for Shares of Another Fund?
How Do I Sell Shares?............................
What Distributions Might I Receive From the Fund?
Transaction Procedures and Special Requirements..
Services to Help You Manage Your Account.........
GLOSSARY
Useful Terms and Definitions.....................
APPENDICES
What Are Some of the Other Investment Policies
and Strategies of, and Risks of an Investment in,
the Underlying Funds?............................
Description of Ratings...........................
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 ended _________, 1996.
CLASS I
SHAREHOLDER TRANSACTION EXPENSES1
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE AGGRESSIVE
TARGET FUND TARGET FUND TARGET FUND
--------------------------------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....... 4.50% 4.50% 4.50%
Deferred Sales Charge2.................... NONE NONE NONE
Exchange Fee (per transaction)3........... NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE AGGRESSIVE
TARGET FUND TARGET FUND TARGET FUND
----------------------------------------
Asset Allocation Fees................... 0.25% 0.25% 0.25%
Rule 12b-1 Fees4........................ 0.25% 0.25% 0.25%
Other Expenses.......................... 0.29% 0.29% 0.29%
----------------------------------------
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 Expenses5.......... 1.62% 1.64% 1.71%
========================================
1 If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
2 A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more if you sell the shares within one year and any Class II
purchase if you sell the shares within 18 months. There is no front-end
sales charge if you invest $1 million or more in Class I shares. See "How
Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
3 $5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
4 These fees may not exceed 0.25%. 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
NASD's rules. 5 The Funds will indirectly bear their pro rata share of the
expenses of the Franklin Templeton Funds in which they invest.
CLASS II
FRANKLIN FRANKLIN FRANKLIN
Shareholder Transaction Expenses1 TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE AGGRESSIVE
TARGET FUND TARGET FUND TARGET FUND
--------------------------------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)2..... 1.00% 1.00% 1.00%
Deferred Sales Charge3 .................. 1.00% 1.00% 1.00%
Exchange Fee (per transaction)4.......... NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES FRANKLIN FRANKLIN FRANKLIN
(as a percentage of average net assets) TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE AGGRESSIVE
TARGET FUND TARGET FUND TARGET FUND
--------------------------------------
Asset Allocation Fees.................... 0.25% 0.25% 0.25%
Rule 12b-1 Fees5......................... 1.00% 1.00% 1.00%
Other Expenses........................... 0.29% 0.29% 0.29%
--------------------------------------
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 Expenses5........... 2.37% 2.39% 2.46%
======================================
1 If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
2 Although 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."
3 A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more if you sell the shares within one year and any Class II
purchase if you sell the shares within 18 months. There is no front-end
sales charge if you invest $1 million or more in Class I shares. 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.
5 These fees may not exceed 1.00%. 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
NASD's rules.
6 The Funds will indirectly bear their pro rata share of the expenses of the
Franklin Templeton Funds in which they invest.
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.
CLASS I FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE AGGRESSIVE
TARGET FUND TARGET FUND TARGET FUND
-----------------------------------------------------------------
ONE YEAR1 $61 $61 $62
THREE YEARS $94 $94 $96
1 Assumes a Contingent Deferred Sales Charge will not apply.
CLASS II FRANKLIN FRANKLIN FRANKLIN
TEMPLETON TEMPLETON TEMPLETON
CONSERVATIVE MODERATE AGGRESSIVE
TARGET FUND TARGET FUND TARGET FUND
----------------------------------------------------------
ONE YEAR $44 $44 $45
THREE YEARS $83 $84 $86
For the same Class II investment, you would pay projected expenses of $34
(Franklin Templeton Conservative Target Fund) $34 (Franklin Templeton Moderate
Target Fund) and $35 (Franklin Templeton Aggressive 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.
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 approval of the Fund's shareholders.
There is no assurance that each Fund will achieve its objective.
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 AGGRESSIVE 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
Franklin Templeton Money Fund Z
INTERNATIONAL EQUITY FUNDS
Templeton Foreign Fund
Templeton Developing Markets Trust
Templeton Global 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 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 Aggressive 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 Aggressive
Target Fund.
PURCHASES OF SHARES OF THE UNDERLYING FUNDS. In investing in Underlying Funds,
the Funds will invest only in Class Z shares of the Underlying Funds, except for
Franklin Templeton Money Fund Z, which only has one class of shares.
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 shares and shares of Franklin Templeton Money Fund Z. 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. 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.
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 engage in these investment
strategies such that more than 5% of its assets will be exposed. For a
discussion of these investment strategies, see "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 "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 Aggressive 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. The investments of each Fund are concentrated
in the Underlying Funds, which means that more than 25% of the value of a Fund's
assets is invested in one or more 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 futures; 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 also 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 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 and Franklin Templeton German
Government Bond Fund.
CONCENTRATION. Five of the Underlying Funds, Utilities Series, Franklin Natural
Resources Fund, Franklin Real Estate Securities Fund, Franklin Gold Fund, and
Franklin Hard Currency Fund, may concentrate their investments in a particular
industry or sector; and 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.
See "HOW DO THE UNDERLYING FUNDS INVEST THEIR ASSETS?" Depending upon the
percentage of a Fund's assets invested in these Underlying Funds, under certain
unusual circumstances, this could result in a Fund being indirectly concentrated
in the corresponding industry, sector or foreign government securities. If this
were to occur, the Funds would consider whether to maintain or change their
investment in that Underlying Fund.
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 Standard & Poor's
Corporation ("S&P") or Moody's Investor Services ("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 acquires (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.
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 Securities Act of
1933 (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.
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 FUND, INC. ("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 FUND, INC. ("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
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, including a money market fund in which
each Fund may invest and which may serve as the cash reserve portion of each
Fund.
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 3 1/2 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 ("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 ("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.
FRANKLIN TEMPLETON MONEY FUND Z OF FRANKLIN TEMPLETON MONEY FUND TRUST ("Money
Fund"). Money Fund's investment objective is high current income consistent with
capital preservation and liquidity. The fund pursues its investment objective by
investing all of its assets in shares of The Money Market Portfolio (the
"Portfolio"), a series of shares of The Money Market Portfolios, which has the
same investment objectives and substantially similar policies and restrictions
as Money Fund. The Portfolio invests all of its assets in various types of money
market instruments, such as U.S. government and federal agency obligations,
certificates of deposit, bankers' acceptances, time deposits of major financial
institutions, high grade commercial paper, high grade short-term corporate
obligations, taxable municipal securities, and repurchase agreements (secured by
U.S. government securities). An investment in the fund and the Portfolio is
neither insured nor guaranteed by the U.S. government. There can be no assurance
that Money Fund will be able to maintain a stable net asset value of $1.00.
In accordance with procedures adopted pursuant to Rule 2a-7 under the 1940 Act
the Portfolio, as a matter of fundamental policy, limits its investments to U.S.
government securities (as discussed below) or U.S. dollar-denominated
instruments which the Board of Trustees of The Money Market Portfolios
determines present minimal credit risks and which are, as required by the
federal securities laws, rated in one of the two highest rating categories as
determined by nationally recognized statistical rating organizations, or which
are unrated and of comparable quality, with remaining maturities of 397 calendar
days or less ("Eligible Securities"). The Portfolio maintains a dollar-weighted
average maturity of the securities in its portfolio of 90 days or less. The
Portfolio will not invest more than 5% of its total assets in Eligible
Securities of a single issuer, other than U.S. government securities, rated in
the highest category by the requisite number of rating organizations, except
that the Portfolio may exceed that limit as permitted by Rule 2a-7 for a period
of up to three business days; and the Portfolio will not invest (a) the greater
of 1% of the Portfolio's total assets or $1 million in Eligible Securities
issued by a single issuer rated in the second highest category; and (b) more
than 5% of its total assets in Eligible Securities of all issuers rated in the
second highest category.
The Portfolio may not invest more than 5% of its total assets in the securities
of companies (including predecessors) which have been in continuous operation
for less than three years, nor invest more than 25% of its total assets in any
particular industry. The Portfolio may, however, invest more than 25% of its
assets in certain domestic bank obligations. Such limitations do not apply to
U.S. government securities and federal agency obligations, or to repurchase
agreements fully collateralized by such government securities or obligations.
The Portfolio may invest in U.S. government securities which consist of
marketable, fixed, floating, and variable rate securities issued or guaranteed
by the U.S. government, its agencies, or by various instrumentalities which have
been established or sponsored by the U.S. government. Certain of these
obligations include U.S. Treasury bills, notes and bonds, GNMAs, obligations of
the Federal Housing Administration, Federal Home Loan Bank obligations, and
Federal National Mortgage Association bonds. In this connection, the Portfolio
may use any portion of its assets invested in U.S. government securities to
concurrently enter into repurchase agreements with respect to such securities.
The Portfolio may also invest in bank obligations or instruments secured by bank
obligations. Such instruments may include fixed, floating, or variable rate
certificates of deposit, letters of credit, time deposits, and bankers'
acceptances issued by banks and savings institutions with assets of at least one
billion dollars. Bank obligations may be obligations of U.S. banks, foreign
branches of U.S. banks ("Eurodollar Investments"), U.S. branches of foreign
banks ("Yankee Dollar Investments"), and foreign branches of foreign banks
("Foreign Bank Investments"). The Portfolio may invest only up to 25% of its
assets in obligations of foreign branches of U.S. or foreign banks. The
Portfolio may, however, invest more than 25% of its assets in certain domestic
bank obligations. Time deposits are non-negotiable deposits maintained in a
foreign branch of a U.S. or foreign banking institution for a specified period
of time at a stated interest rate. The Portfolio may not invest more than 10% of
its assets in time deposits with maturities in excess of seven calendar days.
The Portfolio may also invest in commercial paper of domestic or foreign issuers
subject to the quality and other criteria described above. Commercial paper
obligations may include variable amount master demand notes that are obligations
which permit the investment of fluctuating amounts by the Portfolio at varying
rates of interest pursuant to direct arrangements between the Portfolio, as
lender, and the borrower. The Portfolio, which has no specific limits on
aggregate investments in master demand notes, will invest in notes of only U.S.
issuers. While master demand notes, as such, are not typically rated by credit
rating agencies, if not so rated, the Portfolio may invest in them only if, at
the time of an investment, the issuer meets the criteria set forth above for all
other commercial paper issuers.
The corporate obligations which the Portfolio may purchase are fixed, floating,
and variable rate bonds, debentures, or notes which are considered by the
Portfolio to be Eligible Securities. Such obligations must mature in 397
calendar days or less.
The Portfolio may invest up to 10% of its assets in taxable municipal
securities, issued by or on behalf of states, territories, and possessions of
the U.S. and the District of Columbia and their political subdivisions,
agencies, and instrumentalities, the interest on which is not exempt from
federal income tax. Municipal securities in which the Portfolio invests are
subject to the quality and other criteria described above. Generally, municipal
securities are used to raise money for various public purposes such as
constructing public facilities and making loans to public institutions. Taxable
municipal bonds are generally issued to provide funding for privately operated
facilities.
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 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.
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.
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. 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 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 5% 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 TEMPLETON GERMAN GOVERNMENT BOND FUND OF FRANKLIN TEMPLETON GLOBAL
TRUST ("German Government"). 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's 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.
The 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, 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 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,
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.
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 and Pacific Growth 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 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, Mutual Shares,
Discovery Shares 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, Natural Resources, Mutual Shares, Discovery Shares, Developing Markets,
Greater European, Latin America, Japan, Global Bond, 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, Natural Resources, Mutual
Shares, Discovery Shares, Greater European, Latin America, Japan, Developing
Markets, and Global Bond may purchase and sell 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, Natural Resources, Hard Currency, Global Bond, 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.
Natural Resources, AGE, Global Bond, 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 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). The fund intends to participate in interest rate swaps
with regard to obligations held in its portfolio. To the extent the fund 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.
The Code may limit the Underlying Funds' investment in options, futures, and
Forward Contracts and these transactions are also subject to special tax rules.
See "Additional Information Regarding Taxation" in the SAI for more information.
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?," the Appendix to this prospectus and 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 Aggressive 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 in 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.
FOREIGN SECURITIES. Investments in foreign securities (including Yankee Dollar
Investments, Foreign Bank Investments, and Eurodollar Investments) 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 are 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 will also 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
REITs' 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 Internal Revenue Code and
to maintain exemption from the 1940 Act. By investing in real estate investment
trusts indirectly, a shareholder will bear not only his proportionate share of
the expenses of the fund, but also, indirectly, similar expenses of the real
estate investment trusts.
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 is the investment manager of each Fund and other
funds with aggregate assets of over $81 billion. 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.
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
Masters degree in Business Administration 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 Franklin Templeton, Mr. Gould was president of Huntington Funds. He has
been in the securities industry since 1981.
Seymour R. Singer
Assistant 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
Franklin, 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.
SERVICES PROVIDED BY ADVISERS. Advisers provides general advisory services with
respect to the Fund's assets. Advisers also provides asset allocation services
by allocating the Fund's assets among the Underlying Funds. Advisers also
provides certain administrative services and facilities for the Fund and
performs similar services for other funds, including the Underlying Funds.
Please see "Investment Advisory 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 FEES. The 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; salaries 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.
Under the management 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.
The asset allocation fee to be paid under the management and asset allocation
agreement will be reduced as necessary to comply with the most stringent limits
on Fund expenses of any state where the Fund offers its shares. Currently, the
most restrictive limitation on a fund's allowable expenses for each fiscal year,
as a percentage of its average net assets, is 2.5% of the first $30 million in
assets, 2.0% of the next $70 million, and 1.5% of the assets over $100 million.
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 0.60%
Advisers, Inc.
- ------------------------------------------------------------------------------
Mutual Discovery Franklin Mutual 0.80%
Advisers, Inc.
- ------------------------------------------------------------------------------
Short-Intermediate Advisers 0.625%1
- ------------------------------------------------------------------------------
Government Securities Advisers 0.625%2
- ------------------------------------------------------------------------------
Investment Grade Advisers 0.50%6
- ------------------------------------------------------------------------------
AGE Advisers 0.625%1
- ------------------------------------------------------------------------------
Money Fund ________ _____%
- ------------------------------------------------------------------------------
Templeton Foreign Templeton Global 0.75%7
Advisors Limited
("TGAL")
- ------------------------------------------------------------------------------
Developing Markets Templeton Asset 1.25%
Management Ltd. - Hong
Kong Branch
- ------------------------------------------------------------------------------
Smaller Companies Templeton Investment 0.75%
Counsel, Inc. ("TICI")
- ------------------------------------------------------------------------------
Greater European TGAL 0.75%
- ------------------------------------------------------------------------------
Pacific Growth Advisers; TICI 1.00%8
(sub-adviser)
- ------------------------------------------------------------------------------
Latin America TGAL 1.25%
- ------------------------------------------------------------------------------
Japan TICI 0.75%
- ------------------------------------------------------------------------------
Hard Currency Advisers; TICI 0.65%
(sub-adviser)
- ------------------------------------------------------------------------------
Global Bond TICI 0.50%9
- ------------------------------------------------------------------------------
German Government Advisers; TICI 0.55%
(sub-adviser)
- ------------------------------------------------------------------------------
Gold Advisers 0.625%1
- ------------------------------------------------------------------------------
Natural Resources Advisers 0.625%5
==============================================================================
1 .625% over 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 .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 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.
8 1% 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.
PORTFOLIO TRANSACTIONS. When investing directly in securities, Advisers tries to
obtain the best execution on all transactions. If Advisers believes more than
one broker or dealer can provide the best execution, it may consider research
and related services and the sale of Fund shares when selecting a broker or
dealer. Please see "How Does the Fund Buy Securities For Its Portfolio?" in the
SAI for more information.
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. The Fund may reimburse this amount to
Distributors or others for distribution expenses. 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 pays 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 charge, but certain figures may not include the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield 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 indicate 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.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the 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 business trust 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. In the future,
additional series and classes of shares may be offered.
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.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
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.
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.
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.
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 take into
account 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.
The Funds will inform you at calendar year end of the amount and source of the
dividends and distributions paid to you.
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.
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 a Fund.
You should consult with your tax advisor on potential U.S. and non-U.S. income,
estate or other taxes (including income tax withholding) on your investment in
the Fund or on dividends or distributions paid to you by a Fund.
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 to
as a Percent of Dealer as a
Percentage of
Offering Price
-------------------------
Amount of Purchase Offering Net Amount
at Offering Price Price Invested
- -------------------------------------------------------------------------------
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
oIf 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 Class I and Class II
shares in the Franklin Templeton Funds, as well as those of your spouse,
children under the age of 21 and grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - 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 the 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 sales and other Franklin Templeton Fund 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.
oFor 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, 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 reinvested 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 also will not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
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 and qualified registered investment advisors who have
entered into a supplemental agreement with Distributors for their
clients who are participating in comprehensive fee programs, sometimes
known as wrap 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 below apply 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 described below
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)
oIf 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
CDSC, such as shares from the reinvestment of dividends and capital gains ("free
shares"), $2,000 in shares that are no longer subject to a CDSC because you have
held them for longer than 18 months ("matured shares"), and $3,000 in shares
that are still subject to a CDSC ("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?
<TABLE>
<CAPTION>
You may sell (redeem) your shares at any time.
METHOD Steps to Follow
- --------------------------------------------------------------------------------------------------------------
<S> <C>
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 if you have Telephone requests will be accepted:
completed and sent to us the
telephone redemption o If the request is $50,000 or less. Institutional accounts
agreement included with this may exceed $50,000 by completing a separate agreement. Call
prospectus) Institutional Services to receive a copy.
o If there are no share certificates issued for the shares
you want to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 30 days
- --------------------------------------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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 just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, 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. 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. Capital gains, if any, may be distributed annually, usually once in
December.
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. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE 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 prior to
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 Exchange is open. We determine the
Net Asset Value per share of each class as of the scheduled close of the
Exchange, 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.
We will use the Net Asset Value next calculated after your Securities Dealer
receives your request, which is promptly transmitted to the Fund.
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 PRIOR TO 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.
We may only be liable for losses resulting from unauthorized telephone
transactions if we do not follow reasonable procedures designed to verify the
identity of the caller. When you call, we will request personal or other
identifying information, and will also record calls. For your protection, we may
delay a transaction or not implement one if we are not reasonably satisfied that
telephone 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. You may not 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, you need 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, you will not be able
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. If you register your account as a trust, you should have a valid written
trust document to avoid 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 will not 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 of electronic
instructions. We can 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.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a systematic
withdrawal plan if you plan to buy shares on a regular basis. Shares sold under
the plan may also be subject to a Contingent Deferred Sales Charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS 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.
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 Aggressive 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
(Pacific 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
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.
EXCHANGE - New York Stock Exchange
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
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.
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
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
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 another wholly owned
subsidiary 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, Money Market - 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 - 10% of total assets; Investment Grade - 15% of total assets;
Natural Resources - 33% of total assets; and German Government and Hard Currency
- - 33 1/3% 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 33
1/3% 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 33 1/3% 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, 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 and Pacific Growth may invest in synthetic
convertible securities. A synthetic convertible is created by combining distinct
securities, which together have the two principle 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.
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 Bond's share price may be
reinforcing or offsetting.
The yield and total return of German Bond 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 share price 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 share price 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 or the Underlying
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 obligations 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 and AGE 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 and AGE 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, Money Market, Hard Currency, Developing Markets, Templeton Foreign, Smaller
Companies, Global Bond, Pacific Growth, 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 intends to limit such investments to 5% of its 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 of
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, and Discovery Shares 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, Money
Market, Mutual Shares, Discovery Shares, Greater European, Developing Markets,
German Government, Latin America, Japan, Hard Currency, Global Bond, 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, 30% of Investment Grade's, German Government's and Hard Currency's
total assets, 25% of Value's and Money Market's total assets, 33% of Natural
Resources' total assets and, 331/3% of Greater European's, Pacific Growth'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 Money Market) 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, and Global Bond 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, 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 of the Underlying Funds 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. An Underlying Fund might also incur costs in
liquidating the collateral. The 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 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.
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." 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, Money Market, German
Government and Global Bond may purchase and sell obligations on a "when issued"
or "delayed delivery" basis. Natural Resources, AGE and Short-Intermediate 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, Short-Intermediate will generally
purchase securities on a when-issued basis with the intention of acquiring the
securities, it 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 in terest 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 the 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
[], 199[]
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?..........................................
Investment Restrictions.......................................................
Officers and Trustees.........................................................
Investment Advisory, Asset Allocation and Other Services......................
How Does the Fund Buy Securities For Its Portfolio?...........................
How Do I Buy, Sell and Exchange Shares?.......................................
How Are Fund Shares Valued?...................................................
Additional Information on Distributions and Taxes.............................
The Fund's Underwriter........................................................
How Does the Fund Measure Performance?........................................
Miscellaneous Information.....................................................
Useful Terms and Definitions..................................................
Appendix
Description of Ratings......................................................
When reading this SAI, you will see certain terms in 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 Aggressive Target Fund. Each series may be referred to as the
"Fund" or "Funds."
The Prospectus, dated [], 199[], 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 otherwise 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.
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 currencies, 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.
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) perva siveness 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 also 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 requirements, 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 we 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 33 1/3% 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.
ADDITIONAL RESTRICTIONS. Each Fund has adopted the following additional
restrictions. These restrictions are not fundamental and may be changed without
shareholder approval. Under these restrictions, each Fund MAY NOT:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the Fund may be invested
in other Franklin Templeton Funds.
2. Buy or retain securities of any company in which officers, trustees or
directors of the Trust or the Fund's investment manager individually own more
than one-half of 1% of the securities of such company, and in the aggregate own
more than 5% of the securities of such company.
3. Invest more than 5% of its assets in securities of issuers with less than
three years' continuous operation, including the operations of any predecessor
companies, except that all or substantially all of the assets of the Fund may be
invested in other Franklin Templeton Funds, which may have been in existence for
less than three years. This limitation does not apply to issuers of real estate
investment trusts.
4. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 15% of the value of the Fund's net assets would be invested
in securities that are not readily marketable, including repurchase agreements
maturing in more than seven days. The Fund may, however, invest all or
substantially all of its assets in other Franklin Templeton Funds.
5. Invest directly in warrants (valued at the lower of cost or market) in excess
of 5% of the value of the Fund's net assets. No more than 2% of the value of the
Fund's net assets may be invested in warrants (valued at the lower of cost or
market) that are not listed on the New York or American Stock Exchange.
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 (*).
<TABLE>
<CAPTION>
Positions and Offices
Name, Age and Address with the Trust Principal Occupation During the Past Five Years
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott, III (75) Trustee President and Director, Abbott Corporation (an
1045 Sansome Street investment company); and director, trustee or
San Francisco, CA 94111 managing general partner, as the case may be, of 31 of
the investment companies in the Franklin Group of
Funds.
- --------------------------------------------------------------------------------------------------------------------------
Harris J. Ashton (64) Trustee President, Chief Executive Officer and Chairman of the
General Host Corporation Board, General Host Corporation (nursery and craft
Metro Center, 1 Station Place centers); Director, RBC Holdings, Inc. (a bank holding
Stamford, CT 06904-2045 company) and Bar-S Foods; and director, trustee or
managing general partner, as the case may be, of 55 of
the investment companies in the Franklin Templeton
Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato (64) Trustee Member of the law firm of Pitney, Hardin, Kipp &
Park Avenue at Morris County Szuch; Director of General Host Corporation; director,
P.O. Box 1945 trustee or managing general partner, as the case may
Morristown, NJ 07962-1945 be, of 57 of the investment companies in the Franklin
Templeton Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
David W. Garbellano (81) Trustee Private Investor; Assistant Secretary/Treasurer and
111 New Montgomery St., Director, Berkeley Science Corporation (a venture
#402 capital company); and director, trustee or managing
San Francisco, CA 94105 general partner, as the case may be, of 30 of the
investment companies in the Franklin Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
*Charles B. Johnson (63) Chairman of the President and Director, Franklin Resources, Inc.;
777 Mariners Island Blvd. Board and Trustee Chairman of the Board and Director, Franklin
San Mateo, CA 94404 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 56 of the investment companies
in the Franklin Templeton Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
*Rupert H. Johnson, Jr. (56) Vice President and Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Trustee Resources, Inc. and Franklin Templeton Distributors,
San Mateo, CA 94404 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 60 of the investment
companies in the Franklin Templeton Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
Frank W. T. LaHaye (67) Trustee General Partner, Peregrine Associates and Miller &
20833 Stevens Creek Blvd. LaHaye, which are General Partners of Peregrine
Suite 102 Ventures and Peregrine Ventures II (venture capital
Cupertino, CA 95014 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 26 of
the investment companies in the Franklin Group of
Funds.
- --------------------------------------------------------------------------------------------------------------------------
Gordon S. Macklin (68) Trustee Chairman, White River Corporation (information
8212 Burning Tree Road services); Director, Fund American Enterprises
Bethesda, MD 20817 Holdings, Inc.; MCI Communications, Inc.,
MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One
Mortgage Services Corporation (information services);
and director, trustee or managing general partner, as
the case may be, of 52 of the investment companies in
the Franklin Templeton Group of Funds; and formerly
held the following positions: Chairman, Hambrecht and
Quist Group; Director, H & Q Healthcare Investors;
and President, National Association of Securities
Dealers, Inc.
- --------------------------------------------------------------------------------------------------------------------------
Harmon E. Burns (51) Vice President Executive Vice President, Secretary and Director,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, CA 94404 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 officers
and/or director or trustee of 60 of the investment
companies in the Franklin Templeton Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
Kenneth V. Domingues (64) Vice President - Senior Vice President, Franklin Resources, Inc.,
777 Mariners Island Blvd. Financial Franklin Advisers, Inc., and Franklin Templeton
San Mateo, CA 94404 Reporting and Distributors, Inc.; officer and/or director, as the case
Accounting may be, of other subsidiaries of Franklin Resources,
Standards Inc.; and officer and/or managing general partner, as
the case may be, of 37 of the investment companies in
the Franklin Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
Martin L. Flanagan (36) Vice President and Senior Vice President, Chief Financial Officer and
777 Mariners Island Blvd. Chief Financial Treasurer, Franklin Resources, Inc.; Executive Vice
San Mateo, CA 94404 Officer 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 and Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Secretary Resources, Inc.; Senior Vice President, Franklin
San Mateo, CA 94404 Templeton Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 60 of the investment
companies in the Franklin Templeton Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
Donald P. Gould (38) President Managing Director, Templeton Worldwide, Inc.; from
777 Mariners Island Blvd. November 1993 to present, Executive Vice President,
San Mateo, CA 94404 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 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
one investment company in the Franklin Group of
Funds.
- --------------------------------------------------------------------------------------------------------------------------
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404 Treasurer and
Principal
Accounting Officer Employee of Franklin Advisers, Inc.; and officer of 37
of the investment companies in the Franklin Group of
Funds.
- --------------------------------------------------------------------------------------------------------------------------
Edward V. McVey (58) Vice President Senior Vice President/National Sales Manager,
777 Mariners Island Blvd. Franklin Templeton Distributors, Inc.; and officer of
San Mateo, CA 94404 32 of the investment companies in the Franklin Group
of Funds.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are not now but
may in the future be paid $[] per month plus $[] per meeting attended. 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 the total fees paid to nonaffiliated
Board members by the other funds in the Franklin Templeton Group of Funds.
Number of Boards in
Total Fees Received the Franklin
from the Franklin Templeton Group of
Templeton Group of Funds on Which Each
NAME 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 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 60 registered investment companies, with approximately 166 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 provides office space and furnishings, facilities and equipment
required for managing the business affairs of the Funds. Advisers also maintains
all internal bookkeeping, clerical, secretarial and administrative personnel and
services and provides certain telephone and other mechanical services. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers acts as investment manager or administrator to 36 U.S. registered
investment companies with 124 separate series. 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 or administers. 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.
INVESTMENT ADVISORY AND ASSET ALLOCATION AGREEMENT. The investment advisory and
asset allocation agreement is in effect until [], 199[]. 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.
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. 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, among others, 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, the sale of Fund
shares 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 National Association of Securities
Dealers, it may sometimes receive certain fees when the Fund tenders portfolio
securities pursuant to a tender-offer solicitation. As a means of recapturing
brokerage for the benefit of the Fund, any portfolio securities tendered by the
Fund will be tendered through Distributors if it is legally permissible to do
so. In turn, the next management fee payable to 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 Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - 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:
SIZE OF PURCHASE - U.S. DOLLARS Sales 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 payment 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 prior to 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 prior to 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 first business 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 Exchange, generally 1:00 p.m. Pacific time, each day that the
Exchange is open for trading. As of the date of this SAI, the Fund is informed
that the Exchange 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 prior to 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 Exchange, 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 Exchange. 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 Exchange
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
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
TAXES
Each of Funds 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 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 the Fund's available earnings and
profits. In addition, the Fund would lose its ability to distribute to you as
foreign tax credits the foreign taxes that it has paid, and would be required to
treat these payments as deductions on its return, and as a reduction in the
amount of taxable income otherwise distributable to you.
In order to qualify as a regulated investment company for tax purposes, each
Fund must meet certain specific requirements, including:
1 The Fund must maintain a diversified portfolio of securities, wherein no
investment (other than cash, cash equivalents and U.S.overnment
securities) can exceed 25% of the Fund's total assets, and, with respect
to 50% of the Fund's total assets, no investment other than U.S.
government securities) can exceed 5% the Fund's total assets; 1 The Fund
must distribute to its shareholders at least 90% of its net investment
income and net tax-exempt income for each of its fiscal years; and 1The
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.
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.
Redemptions and exchanges of Fund 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. 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.
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 of shares sold within 90 days of
their purchase (for the purpose of determining gain or loss upon the sale of
such shares) if you reinvest the sales proceeds in the Fund or in another Fund
in the Franklin Templeton Group of Funds, and the sales charge that would
otherwise apply to your reinvestment is reduced or eliminated because of your
reinvestment with Franklin Templeton. The portion of the sales charge excluded
from your tax basis in the shares sold will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment in another Franklin Templeton fund.
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 the Fund are generally governed by Section 1256 of the
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each 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 Fund's fiscal (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain currency gain or loss covered by Section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Even though marked to market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-capital losses
within the Underlying Fund. The acceleration of income on Section 1256 positions
may require the Fund to accrue taxable income without the corresponding receipt
of cash. In order to generate cash to satisfy the distribution requirements of
the Code, the 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 Fund shares. In these ways, any or all of these
rules may affect both the amount, character and time of income distributed to
shareholders by the Fund.
When an Underlying Fund holds an option or contract which substantially
diminishes the Fund's risk of loss with respect to another position of the Fund
(as might occur in some hedging transactions), this combination of positions
could be treated as a "straddle" for tax purposes, possibly resulting in
deferral of losses, adjustments in the holding periods and conversion of
short-term capital losses into long-term capital losses. The 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.
Distributions paid to you by a Fund of ordinary income and short-term capital
gains arising from the Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. Each
Fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
An underlying Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the total assets of the
Underlying Fund at the end of its fiscal year are invested in securities of
foreign corporations, the Underlying Fund may elect to pass-through to any fund
in the Fund Allocator Series of the Allocator Series Fund's pro rata share of
foreign taxes paid by the Underlying Fund. If this election is made, you will be
(i) required to include in your gross income your pro rata share of foreign
source income (including any foreign taxes paid by the Fund), and (ii) entitled
to either deduct your share of such foreign taxes in computing your taxable
income or to claim a credit for such taxes against your U.S. income tax, subject
to certain limitations under the Code.
If the Fund elects to pass through to you foreign income taxes that it paid, you
will be informed at the end of the calendar year of the amount of foreign taxes
paid and foreign sources income that must be included on your federal income tax
return. If the Fund invests 50% or less of its total assets in securities of
foreign corporations, it will not be entitled to pass-through to you your
pro-rata share of the foreign taxes paid by the Fund. In this case, these taxes
will be taken as a deduction by the Fund, and the income reported to you will be
the net amount after these deductions.
The Underlying Funds may invest in shares of foreign corporation which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income.
If the Underlying Fund receives an "excess distribution" with respect to PFIC
stock, the Underlying Fund itself may be subject to U.S. federal income tax on a
portion of the distribution, whether or not the corresponding income is
distributed by the Fund. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Fund held the PFIC shares. The Underlying Fund itself will be subject
to tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years, and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. In this case, you would
not be permitted to claim a credit on your own tax return for the tax paid by
the 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 Underlying Fund distributions to you 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 some
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 amounts distributable to you by
the Fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you. This may affect the net asset value of the Allocator
Series Fund investing in such Underlying Fund.
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 the Fund will generally seek to avoid investing in PFIC shares to avoid
the tax consequences detailed above, there are no guarantees that it will do so
and it reserves the right to make such investments as a matter of its
fundamental investment policy.
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 the Underlying Fund to recognize income and
make distributions to the Allocator Series Fund prior to its receipt of cash
payments. Zero coupon and delayed interest bonds are normally issued at a
discount and are therefore generally subject to tax reporting as OID
obligations. The 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,
and in turn, the Allocator Series 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.
The Fund may be required to accrue income on defaulted obligations and to
distribute such income to you even though it is not currently receiving interest
or principal payments on such obligations. In order to generate cash to satisfy
these distribution requirements, the Fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering 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.
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 Class II purchase.
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 National Association of Securities Dealers, Inc.
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
management 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.
Current yield and average annual total return 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 is not necessarily indicative of future results, but 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:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of 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. The Fund may also quote the cumulative total return for
each class, in addition to the average annual total return. These quotations are
computed the same way, except the cumulative total return 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:
6
Yield = 2 [(A-B + 1) - 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
For investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I 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
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 New York Stock Exchange.
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 - measure total return and/or
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 equity 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 class.
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)Lehmnan 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 $145
billion in assets under management for more than 4.1 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 115 U.S. based mutual funds 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 Fund's outstanding shares.
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, prior to
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
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
EXCHANGE - New York Stock Exchange
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 mutual funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc.
IRS - Internal Revenue Service
LETTER - Letter of Intent
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.
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 [], 199[], as may be amended from
time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution 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 another
wholly-owned subsidiary of Resources.
APPENDIX
DESCRIPTION OF RATINGS
Corporate Bond Ratings
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be 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
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
a) Financial Statements
(1) To be filed by Amendment
b) Exhibits:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust
(ii) Certificate of Amendment of Agreement and
Declaration of Trust of Franklin Templeton Fund
Manager
(iii) Certificate of Trust
(iv) Certificate of Amendment to the Certificate of
Trust of Franklin Templeton Fund Manager
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
(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) Form of Investment Advisory and Asset Allocation
Agreement between Registrant and Franklin
Advisers, Inc.
(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) Form of Distribution Agreement between Registrant
and Franklin/Templeton Distributors, Inc.
(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) Form of Master Custody Agreement to be filed by
Amendment
(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 to be filed by Amendment
(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) To be filed by Amendment
(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) To be filed by Amendment
(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) To be filed by Amendment
(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) Form of Class I Distribution Plan pursuant to Rule 12b-1
between Registrant and Franklin/Templeton Distributors, Inc.
(ii) Form of Class II Distribution Plan pursuant to Rule 12b-1
between Registrant and Franklin/Templeton Distributors, Inc.
(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
(ii) Certificate of Secretary September 18, 1995
(18) Copies of any plan entered into by registrant pursuant to Rule
18f-3 under the 1940 Act
(i) Form of Multiple Class Plan
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 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 3rd day of October, 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 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: October 3, 1996
Martin L. Flanagan* Principal Financial Officer
(Martin L. Flanagan) Dated: October 3, 1996
Diomedes Loo-Tam* Principal Accounting Officer
(Diomedes Loo-Tam) Dated: October 3, 1996
Frank H. Abbott III* Trustee
(Frank H. Abbott III) Dated: October 3, 1996
Harris J. Ashton* Trustee
(Harris J. Ashton) Dated: October 3, 1996
S. Joseph Fortunato* Trustee
(S. Joseph Fortunato) Dated: October 3, 1996
David W. Garbellano* Trustee
(David W. Garbellano) Dated: October 3, 1996
Charles B. Johnson* Trustee
(Charles B. Johnson) Dated: October 3, 1996
Rupert H. Johnson, Jr.* Trustee
(Rupert H. Johnson, Jr.) Dated: October 3, 1996
Frank W.T. LaHaye* Trustee
(Frank W.T. LaHaye) Dated: October 3, 1996
Gordon S. Macklin* Trustee
(Gordon S. Macklin) Dated: October 3, 1996
*By: /s/ Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)
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 Attached
EX-99.B1(ii) Certificate of Amendment of Agreement Attached
and Declaration of Trust of Franklin
Templeton Fund Manager
EX-99.B1(iii) Certificate of Trust Attached
EX-99.B1(iv) Certificate of Amendment to the Attached
Certificate of Trust of Franklin
Templeton Fund Manager
EX-99.B2(i) By-Laws Attached
EX-99.B5(i) Form of Investment Advisory and Asset Attached
Allocation Agreement between
Registrant and Franklin Advisers, Inc.
EX-99.B6(i) Form of Distribution Agreement between Attached
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.
and dealers
EX-99.B8(i) Form of Master Custody Agreement to be **
filed by Amendment
EX-99.B8(ii) Copy of Custodian Agreement between *
Registrant and Citibank Delaware:
EX-99.B9(i) Administration Agreement to be filed **
by Amendment
EX-99.B10(i) To be filed by Amendment **
EX-99.B11(i) To be filed by Amendment **
EX-99.B13(i) To be filed by Amendment **
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Form of Class I Distribution Plan Attached
pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B15(ii) Form of Class II Distribution Plan Attached
pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B17(i) Power of Attorney dated September 18, Attached
1995
EX-99.B17(ii) Certificate of Secretary dated Attached
September 18, 1995
EX-99.B18(i) Form of Multiple Class Plan Attached
* INCORPORATED BY REFERENCE
** TO BE FILED BY AMENDMENT
AGREEMENT AND DECLARATION OF TRUST
of
FRANKLIN TEMPLETON FUND MANAGER
a Delaware Business Trust
Dated:
TABLE OF CONTENTS
FRANKLIN TEMPLETON FUND MANAGER
AGREEMENT AND DECLARATION OF TRUST
PAGE NO.
ARTICLE I Name and Definitions . . . . . . . . . . . . . . . . . 1
Section 1. Name . . . . . . . . . . . . . . . . . . . 1
Section 2. Definitions . . . . . . . . . . . . . . 1
(a) Trust . . . . . . . . . . . . . . 1
(b) Trust Property. . . . . . . . . . 1
(c) Trustees. . . . . . . . . . . . . 1
(d) Shares. . . . . . . . . . . . . . 2
(e) Shareholder . . . . . . . . . . . 2
(f) Person. . . . . . . . . . . . . . 2
(g) 1940 Act. . . . . . . . . . . . . 2
(h) Commission and Principal
Underwriter . . . . . . . . . . . 2
(i) Declaration of Trust. . . . . . . 2
(j) By-Laws . . . . . . . . . . . . . 2
(k) Interested Person . . . . . . . . 2
(l) Investment Manager. . . . . . . . 2
(m) Series. . . . . . . . . . . . . . 2
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Purpose of Trust. . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III . . . . . . . . . . . . . . . . . . .. . . . . . . . . . 3
Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1. Division of Beneficial Interest. . . . . . 3
Section 2. Ownership of Shares. . . . . . . . . . . . 3
Section 3. Investments in the Trust . . . . . . . . . 4
Section 4. Status of Shares and Limitation of
Personal Liability . . . . . . . . . . . . 4
Section 5. Power of Board of Trustees to Change
Provisions Relating to Shares. . . . . . . 4
Section 6. Establishment and Designation of
Shares . . . . . . . . . . . . . . . . . . 5
(a) Assets Held with Respect to a
Particular Series . . . . . . . . 5
(b) Liabilities Held with Respect to a
Particular Series . . . . . . . . 6
(c) Dividends, Distributions,
Redemptions, and Repurchases. . . 6
(d) Voting . . . . . . . . . .. . . . 7
(e) Equality . . . . . . . .. . . . . 7
(f) Fractions . . . . . . . . . . . . 7
(g) Exchange Privilege . . . .. . . . 7
(h) Combination of Series . . . . . . 7
(i) Elimination of Series . . . . . . 7
Section 7. Indemnification of Shareholders. . . . . . 8
ARTICLE IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Board of Trustees . . . . . . . . . . . . . . . . . . . . 8
Page
Section 1. Number, Election and Tenure. . . . . . . . 8
Section 2. Effect of Death, Resignation, etc. of
a Trustee. . . . . . . . . . . . . . . . . 9
Section 3. Powers . . . . . . . . . . . . . . . . . . 9
Section 4. Payment of Expenses by the Trust . . . . . 13
Section 5. Payment of Expenses by Shareholders. . . . 13
Section 6. Ownership of Assets of the Trust . . . . . 13
Section 7. Service Contracts. . . . . . . . . . . . . 13
ARTICLE V 15
Shareholders' Voting Powers and Meetings. . . . . . . . . . . 15
Section 1. Voting Powers. . . . . . . . . . . . . . . 15
Section 2. Voting Power and Meetings. . . . . . . . . 15
Section 3. Quorum and Required Vote . . . . . . . . . 16
Section 4. Action by Written Consent. . . . . . . . . 16
Section 5. Record Dates . . . . . . . . . . . . . . . 16
Section 6. Additional Provisions. . . . . . . . . . . 17
ARTICLE VI 17
Net Asset Value, Distributions, and Redemptions . . . . . . . 17
Section 1. Determination of Net Asset Value, Net
Income, and Distributions . . . . . . . . . 17
Section 2. Redemptions and Repurchases . . . . . . . . 17
Section 3. Redemptions at the Option of the
Trust . . . . . . . . . . . . . . . . . . . 17
ARTICLE VII 18
Compensation and Limitation of Liability of Trustees. . . . . 18
Section 1. Compensation . . . . . . . . . . . . . . . 18
Section 2. Indemnification and Limitation of
Liability. . . . . . . . . . . . . . . . . 18
Section 3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety. . . . . . . . . 19
Section 4. Insurance. . . . . . . . . . . . . . . . . 19
ARTICLE VIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 1. Liability of Third Persons Dealing
with Trustees. . . . . . . . . . . . . . . 19
Section 2. Termination of Trust or Series . . . . . . 20
Section 3. Merger and Consolidation . . . . . . . . . 20
Section 4. Amendments . . . . . . . . . . . . . . . . 21
Section 5. Filing of Copies, References,
Headings . . . . . . . . . . . . . . . . . 21
Section 6. Applicable Law . . . . . . . . . . . . . . 21
Section 7. Provisions in Conflict with Law or
Regulations. . . . . . . . . . . . . . . . 22
Section 8. Business Trust Only . . . . . . . . . . . . 22
Section 9. Use of the name "Franklin". . . . . . . . . 22
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TEMPLETON FUND MANAGER
WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and entered into
as of the date set forth below by the Trustees named hereunder for the purpose
of forming a Delaware business trust in accordance with the provisions
hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that a Certificate of Trust be
filed with the Office of the Secretary of State of the State of Delaware and do
hereby declare that the Trustees will hold IN TRUST all cash, securities and
other assets which the Trust now possesses or may hereafter acquire from time to
time in any manner and manage and dispose of the same upon the following terms
and conditions for the pro rata benefit of the holders of Shares in this Trust.
ARTICLE I.
Name and Definitions
SECTION 1. NAME. This trust shall be known as "Franklin Templeton Fund
Manager" and the Trustees shall conduct the business of the Trust under that
name or any other name as they may from time to time determine.
SECTION 2. DEFINITIONS. Whenever used herein, unless otherwise required by
the context or specifically provided:
(a) The "Trust" refers to the Delaware business trust established by this
Agreement and Declaration of Trust, as amended from time to time;
(b) The "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust, including without limitation the rights referenced in Article VIII,
Section 9 hereof;
(c) "Trustees" refers to the persons who have signed this Agreement and
Declaration of Trust, so long as they continue in office in accordance with the
terms hereof, and all other persons who may from time to time be duly elected or
appointed to serve on the Board of Trustees in accordance with the provisions
hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in their capacity as trustees hereunder;
(d) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures, estates and other entities, whether or not
legal entities, and governments and agencies and political subdivisions thereof,
whether domestic or foreign;
(g) The "1940 Act" refers to the Investment Company Act of 1940 and the
Rules and Regulations thereunder, all as amended from time to time;
(h) The terms "Commission" and "Principal Underwriter" shall have the
respective meanings given them in Section 2(a)(7) and Section (2)(a)(29) of the
1940 Act;
(i) "Declaration of Trust" shall mean this Agreement and Declaration of
Trust, as amended or restated from time to time;
(j) "By-Laws" shall mean the By-Laws of the Trust as amended from time to
time and incorporated herein by reference;
(k) The term "Interested Person" has the meaning given it in Section
2(a)(19) of the 1940 Act;
(l) "Investment Manager" or "Manager" means a party furnishing services to
the Trust pursuant to any contract described in Article IV, Section 7(a) hereof;
(m) "Series" refers to each Series of Shares established and designated
under or in accordance with the provisions of Article III and shall mean an
entity such as that described in Section 18(f)(2) of the 1940 Act, and subject
to Rule 18f-2 thereunder.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business
of a management investment company registered under the 1940 Act through one or
more Series investing primarily in securities.
ARTICLE III.
Shares
SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, with a
par value of $ .01 per Share. The Trustees may authorize the division of Shares
into separate Series and the division of Series into separate classes of Shares.
The different Series shall be established and designated, and the variations in
the relative rights and preferences as between the different Series shall be
fixed and determined, by the Trustees. If only one or no Series (or classes)
shall be established, the Shares shall have the rights and preferences provided
for herein and in Article III, Section 6 hereof to the extent relevant and not
otherwise provided for herein, and all references to Series (and classes) shall
be construed (as the context may require) to refer to the Trust.
Subject to the provisions of Section 6 of this Article III, each Share
shall have voting rights as provided in Article V hereof, and holders of the
Shares of any Series shall be entitled to receive dividends, when, if and as
declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Shares shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions upon termination of
the Trust or of such Series made pursuant to Article VIII, Section 4 hereof. All
dividends and distributions shall be made ratably among all Shareholders of a
particular (class of a) Series from the assets held with respect to such Series
according to the number of Shares of such (class of such) Series held of record
by such Shareholder on the record date for any dividend or distribution or on
the date of termination, as the case may be. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust or any Series. The Trustees may from time to time
divide or combine the Shares of any particular Series into a greater or lesser
number of Shares of that Series without thereby materially changing the
proportionate beneficial interest of the Shares of that Series in the assets
held with respect to that Series or materially affecting the rights of Shares of
any other Series.
SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall be recorded
on the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each Series (or class).
No certificates certifying the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the transfer of Shares of each
Series (or class) and similar matters. The record books of the Trust as kept by
the Trust or any transfer or similar agent, as the case may be, shall be
conclusive as to who are the Shareholders of each Series (or class) and as to
the number of Shares of each Series (or class) held from time to time by each.
SECTION 3. INVESTMENTS IN THE TRUST. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize. Each investment
shall be credited to the individual Shareholder's account in the form of full
and fractional Shares of the Trust, in such Series (or class) as the purchaser
shall select, at the net asset value per Share next determined for such Series
(or class) after receipt of the investment; provided, however, that the Trustees
may, in their sole discretion, impose a sales charge upon investments in the
Trust.
SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the existence of the
Trust shall not operate to terminate the Trust, nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders as partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust shall have any power to bind personally any
Shareholders, nor, except as specifically provided herein, to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.
SECTION 5. POWER OF BOARD OF TRUSTEES TO CHANGE PROVISIONS RELATING TO
Shares. Notwithstanding any other provisions of this Declaration of Trust and
without limiting the power of the Board of Trustees to amend the Declaration of
Trust as provided elsewhere herein, the Board of Trustees shall have the power
to amend this Declaration of Trust, at any time and from time to time, in such
manner as the Board of Trustees may determine in their sole discretion, without
the need for Shareholder action, so as to add to, delete, replace or otherwise
modify any provisions relating to the Shares contained in this Declaration of
Trust, provided that before adopting any such amendment without Shareholder
approval the Board of Trustees shall determine that it is consistent with the
fair and equitable treatment of all Shareholders or that Shareholder approval is
not otherwise required by the 1940 Act or other applicable law. If Shares have
been issued, Shareholder approval shall be required to adopt any amendments to
this Declaration of Trust which would adversely affect to a material degree the
rights and preferences of the Shares of any Series (or class) or to increase or
decrease the par value of the Shares of any Series (or class).
Subject to the foregoing Paragraph, the Board of Trustees may amend the
Declaration of Trust to amend any of the provisions set forth in paragraphs (a)
through (i) of Section 6 of this Article III.
SECTION 6. ESTABLISHMENT AND DESIGNATION OF SHARES. The establishment and
designation of any Series (or class) of Shares shall be effective upon the
resolution by a majority of the then Trustees, adopting a resolution which sets
forth such establishment and designation and the relative rights and preferences
of such Series (or class). Each such resolution shall be incorporated herein by
reference upon adoption.
Shares of each Series (or class) established pursuant to this Section 6,
unless otherwise provided in the resolution establishing such Series, shall have
the following relative rights and preferences:
(a) ASSETS HELD WITH RESPECT TO A PARTICULAR SERIES. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject only
to the rights of creditors, and shall be so recorded upon the books of account
of the Trust. Such consideration, assets, income, earnings, profits and proceeds
thereof, from whatever source derived, including, without limitation, any
proceeds derived from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any reinvestment of such proceeds, in whatever
form the same may be, are herein referred to as "assets held with respect to"
that Series. In the event that there are any assets, income, earnings, profits
and proceeds thereof, funds or payments which are not readily identifiable as
assets held with respect to any particular Series (collectively "General
Assets"), the Trustees shall allocate such General Assets to, between or among
any one or more of the Series in such manner and on such basis as the Trustees,
in their sole discretion, deem fair and equitable, and any General Asset so
allocated to a particular Series shall be held with respect to that Series. Each
such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(b) LIABILITIES HELD WITH RESPECT TO A PARTICULAR SERIES. The assets of the
Trust held with respect to each particular Series shall be charged against the
liabilities of the Trust held with respect to that Series and all expenses,
costs, charges and reserves attributable to that Series, and any general
liabilities of the Trust which are not readily identifiable as being held with
respect to any particular Series shall be allocated and charged by the Trustees
to and among any one or more of the Series in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. The liabilities,
expenses, costs, charges, and reserves so charged to a Series are herein
referred to as "liabilities held with respect to" that Series. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all purposes. All
Persons who have extended credit which has been allocated to a particular
Series, or who have a claim or contract which has been allocated to any
particular Series, shall look, and shall be required by contract to look
exclusively, to the assets of that particular Series for payment of such credit,
claim, or contract. In the absence of an express contractual agreement so
limiting the claims of such creditors, claimants and contract providers, each
creditor, claimant and contract provider will be deemed nevertheless to have
impliedly agreed to such limitation unless an express provision to the contrary
has been incorporated in the written contract or other document establishing the
claimant relationship.
(c) DIVIDENDS, DISTRIBUTIONS, REDEMPTIONS, AND REPURCHASES. Notwithstanding
any other provisions of this Declaration of Trust, including, without
limitation, Article VI, no dividend or distribution including, without
limitation, any distribution paid upon termination of the Trust or of any Series
(or class) with respect to, nor any redemption or repurchase of, the Shares of
any Series (or class) shall be effected by the Trust other than from the assets
held with respect to such Series, nor, except as specifically provided in
Section 7 of this Article III, shall any Shareholder of any particular Series
otherwise have any right or claim against the assets held with respect to any
other Series except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) VOTING. All Shares of the Trust entitled to vote on a matter shall vote
separately by Series (and, if applicable, by class): that is, the Shareholders
of each Series (or class) shall have the right to approve or disapprove matters
affecting the Trust and each respective Series (or class) as if the Series (or
classes) were separate companies. There are, however, two exceptions to voting
by separate Series (or classes). First, if the 1940 Act requires all Shares of
the Trust to be voted in the aggregate without differentiation between the
separate Series (or classes), then all the Trust's Shares shall be entitled to
vote on a one-vote-per-Share basis. Second, if any matter affects only the
interests of some but not all Series (or classes), then only the Shareholders of
such affected Series (or classes) shall be entitled to vote on the matter.
(e) EQUALITY. All the Shares of each particular Series shall represent an
equal proportionate undivided interest in the assets held with respect to that
Series (subject to the liabilities held with respect to that Series and such
rights and preferences as may have been established and designated with respect
to classes of Shares within such Series), and each Share of any particular
Series shall be equal to each other Share of that Series.
(f) FRACTIONS. Any fractional Share of a Series shall carry proportionately
all the rights and obligations of a whole share of that Series, including rights
with respect to voting, receipt of dividends and distributions, redemption of
Shares and termination of the Trust.
(g) EXCHANGE PRIVILEGE. The Trustees shall have the authority to provide
that the holders of Shares of any Series shall have the right to exchange said
Shares for Shares of one or more other Series of Shares in accordance with such
requirements and procedures as may be established by the Trustees.
(h) COMBINATION OF SERIES. The Trustees shall have the authority, without
the approval of the Shareholders of any Series unless otherwise required by
applicable law, to combine the assets and liabilities held with respect to any
two or more Series into assets and liabilities held with respect to a single
Series.
(i) ELIMINATION OF SERIES. At any time that there are no Shares outstanding
of any particular Series (or class) previously established and designated, the
Trustees may by resolution of a majority of the then Trustees abolish that
Series (or class) and rescind the establishment and designation thereof.
SECTION 7. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder or former
Shareholder shall be exposed to liability by reason of a claim or demand
relating to his or her being or having been a Shareholder, and not because of
his or her acts or omissions, the Shareholder or former Shareholder (or his or
her heirs, executors, administrators, or other legal representatives or in the
case of a corporation or other entity, its corporate or other general successor)
shall be entitled to be held harmless from and indemnified out of the assets of
the Trust against all loss and expense arising from such claim or demand.
ARTICLE IV
The Board of Trustees
SECTION 1. NUMBER, ELECTION AND TENURE. The number of Trustees constituting
the Board of Trustees shall be fixed from time to time by a written instrument
signed, or by resolution approved at a duly constituted meeting, by a majority
of the Board of Trustees, provided, however, that the number of Trustees shall
in no event be less than one (1) nor more than fifteen (15). The Board of
Trustees, by action of a majority of the then Trustees at a duly constituted
meeting, may fill vacancies in the Board of Trustees or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he or she dies, resigns, is declared bankrupt or incompetent by a
court of appropriate jurisdiction, or is removed, or, if sooner, until the next
meeting of Shareholders called for the purpose of electing Trustees and until
the election and qualification of his or her successor. Any Trustee may resign
at any time by written instrument signed by him and delivered to any officer of
the Trust or to a meeting of the Trustees. Such resignation shall be effective
upon receipt unless specified to be effective at some other time. Except to the
extent expressly provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any compensation for
any period following his or her resignation or removal, or any right to damages
on account of such removal. The Shareholders may fix the number of Trustees and
elect Trustees at any meeting of Shareholders called by the Trustees for that
purpose. Any Trustee may be removed at any meeting of Shareholders by a vote of
two-thirds of the outstanding Shares of the Trust. A meeting of Shareholders for
the purpose of electing or removing one or more Trustees may be called (i) by
the Trustees upon their own vote, or (ii) upon the demand of Shareholders owning
10% or more of the Shares of the Trust in the aggregate.
SECTION 2. EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. The death,
declination, resignation, retirement, removal, or incapacity of one or more
Trustees, or all of them, shall not operate to annul the Trust or to revoke any
existing agency created pursuant to the terms of this Declaration of Trust.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is
filled as provided in Article IV, Section 1, the Trustees in office, regardless
of their number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by this Declaration of Trust.
As conclusive evidence of such vacancy, a written instrument certifying the
existence of such vacancy may be executed by an officer of the Trust or by a
majority of the Board of Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to fill vacancies, the Trust's
Investment Manager(s) are empowered to appoint new Trustees subject to the
provisions of Section 16(a) of the 1940 Act.
SECTION 3. POWERS. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Board of Trustees, and such
Board shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in securities transactions of all
kinds on behalf of the Trust. Trustees in all instances shall act as principals,
and are and shall be free from the control of the Shareholders. The Trustees
shall have full power and authority to do any and all acts and to make and
execute any and all contracts and instruments that they may consider necessary
or appropriate in connection with the administration of the Trust. Without
limiting the foregoing, the Trustees may: adopt By-Laws not inconsistent with
this Declaration of Trust providing for the regulation and management of the
affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; fill vacancies in or
remove from their number, and may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; appoint from their own
number and establish and terminate one or more committees consisting of two or
more Trustees which may exercise the powers and authority of the Board of
Trustees to the extent that the Trustees determine; employ one or more
custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities or with a Federal Reserve
Bank, retain a transfer agent or a shareholder servicing agent, or both; provide
for the issuance and distribution of Shares by the Trust directly or through one
or more Principal Underwriters or otherwise; redeem, repurchase and transfer
Shares pursuant to applicable law; set record dates for the determination of
Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series;
establish from time to time, in accordance with the provisions of Article III,
Section 6 hereof, any Series (or class) of Shares, each such Series (or class)
to operate as a separate and distinct investment medium and with separately
defined investment objectives and policies and distinct investment purpose; and
in general delegate such authority as they consider desirable to any officer of
the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian, transfer or shareholder servicing agent, or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees. Unless otherwise specified or required by law,
any action by the Board of Trustees shall be deemed effective if approved or
taken by a majority of the Trustees then in office. Any action required or
permitted to be taken at any meeting of the Board of Trustees, or any committee
thereof, may be taken without a meeting if all members of the Board of Trustees
or committee (as the case may be) consent thereto in writing, and the writing or
writings are filed with the minutes of the proceedings of the Board of Trustees,
or committee.
Without limiting the foregoing, the Trust shall have power and authority:
(a) To invest and reinvest cash, to hold cash uninvested, and to subscribe
for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge,
sell, assign, transfer, exchange, distribute, write options on, lend or
otherwise deal in or dispose of contracts for the future acquisition or delivery
of fixed income or other securities, and securities of every nature and kind,
including, without limitation, all types of bonds, debentures, stocks, preferred
stocks, negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write
options with respect to or otherwise deal in any property rights relating to any
or all of the assets of the Trust or any Series, subject to any requirements of
the 1940 Act;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and right of subscription or otherwise which in any
manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating that it is
trust property, whether in bearer, unregistered or other negotiable form, or in
its own name or in the name of a custodian or subcustodian or a nominee or
nominees or otherwise or to authorize the custodian or a subcustodian or a
nominee or nominees to deposit the same in a securities depository, subject in
each case to proper safeguards according to the usual practice of investment
companies or any rules or regulations applicable thereto;
(f) To consent to, or participate in, any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and any
other combinations or associations;
(j) To borrow funds or other property in the name of the Trust exclusively
for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other obligations
of any Person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such insurance
as the Trustees may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, investment adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability; and
(m) To adopt, establish and carry out pension, profit-sharing, share bonus,
share purchase, savings, thrift and other retirement, incentive and benefit
plans, trusts and provisions, including the purchasing of life insurance and
annuity contracts as a means of providing such retirement and other benefits,
for any or all of the Trustees, officers, employees and agents of the Trust.
The Trust shall not be limited to investing in obligations maturing before
the possible termination of the Trust or one or more of its Series. The Trust
shall not in any way be bound or limited by any present or future law or custom
in regard to investment by fiduciaries. The Trust shall not be required to
obtain any court order to deal with any assets of the Trust or take any other
action hereunder.
SECTION 4. PAYMENT OF EXPENSES BY THE TRUST. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust or Series
(or class), or partly out of the principal and partly out of income, and to
charge or allocate the same to, between or among such one or more of the Series
(or class) that may be established or designated pursuant to Article III,
Section 6, as they deem fair, all expenses, fees, charges, taxes and liabilities
incurred or arising in connection with the Trust or Series (or class), or in
connection with the management thereof, including, but not limited to, the
Trustees' compensation and such expenses and charges for the services of the
Trust's officers, employees, investment adviser or manager, principal
underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.
SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series, to pay directly, in advance or arrears,
for charges of the Trust's custodian or transfer, Shareholder servicing or
similar agent, an amount fixed from time to time by the Trustees, by setting off
such charges due from such Shareholder from declared but unpaid dividends owed
such Shareholder and/or by reducing the number of shares in the account of such
Shareholder by that number of full and/or fractional Shares which represents the
outstanding amount of such charges due from such Shareholder.
SECTION 6. OWNERSHIP OF ASSETS OF THE TRUST. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trust, except that
the Trustees shall have power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
SECTION 7. SERVICE CONTRACTS.
(a) Subject to such requirements and restrictions as may be set forth in
the By-Laws, the Trustees may, at any time and from time to time, contract for
exclusive or nonexclusive advisory, management and/or administrative services
for the Trust or for any Series with any corporation, trust, association or
other organization; and any such contract may contain such other terms as the
Trustees may determine, including without limitation, authority for the
Investment Manager or administrator to determine from time to time without prior
consultation with the Trustees what investments shall be purchased, held, sold
or exchanged and what portion, if any, of the assets of the Trust shall be held
uninvested and to make changes in the Trust's investments, or such other
activities as may specifically be delegated to such party.
(b) The Trustees may also, at any time and from time to time, contract with
any corporation, trust, association or other organization, appointing it
exclusive or nonexclusive distributor or Principal Underwriter for the Shares of
one or more of the Series (or classes) or other securities to be issued by the
Trust. Every such contract shall comply with such requirements and restrictions
as may be set forth in the By-Laws; and any such contract may contain such other
terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to time, to
contract with any corporations, trusts, associations or other organizations,
appointing it or them the custodian, transfer agent and/or shareholder servicing
agent for the Trust or one or more of its Series. Every such contract shall
comply with such requirements and restrictions as may be set forth in the
By-Laws or stipulated by resolution of the Trustees.
(d) The Trustees are further empowered, at any time and from time to time,
to contract with any entity to provide such other services to the Trust or one
or more of the Series, as the Trustees determine to be in the best interests of
the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the
Trust is a shareholder, director, officer, partner, trustee,
employee, Manager, adviser, Principal Underwriter, distributor,
or affiliate or agent of or for any corporation, trust,
association, or other organization, or for any parent or
affiliate of any organization with which an advisory, management
or administration contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter be
made, or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or
that
(ii) any corporation, trust, association or other
organization with which an advisory, management or administration
contract or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other type of service contract
may have been or may hereafter be made also has an advisory,
management or administration contract, or principal underwriter's
or distributor's contract, or transfer, shareholder servicing or
other service contract with one or more other corporations,
trust, associations, or other organizations, or has other
business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
SECTION 8 VOTING POWERS. Subject to the provisions of Article III, Section
6(d), the Shareholders shall have power to vote only (i) for the election or
removal of Trustees as provided in Article IV, Section 1, and (ii) with respect
to such additional matters relating to the Trust as may be required by this
Declaration of Trust, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger.
SECTION 9. VOTING POWER AND MEETINGS. Meetings of the Shareholders may be
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven (7) days
before such meeting, postage prepaid, stating the time and place of the meeting,
to each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust or the By-Laws, a written waiver thereof,
executed before or after the meeting by such Shareholder or his or her attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
SECTION 10. QUORUM AND REQUIRED VOTE. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more Series (or classes) is to vote as
a single class separate from any other Shares, forty percent (40%) of the Shares
of each such Series (or classes) entitled to vote shall constitute a quorum at a
Shareholder's meeting of that Series. Any meeting of Shareholders may be
adjourned from time to time by a majority of the votes properly cast upon the
question of adjourning a meeting to another date and time, whether or not a
quorum is present, and the meeting may be held as adjourned within a reasonable
time after the date set for the original meeting without further notice. Subject
to the provisions of Article III, Section 6(d), when a quorum is present at any
meeting, a majority of the Shares voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by applicable law.
SECTION 11. ACTION BY WRITTEN CONSENT. Any action taken by Shareholders may
be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series (or class) entitled to vote separately on the matter
consent to the action in writing and such written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
SECTION 12. RECORD DATES. For the purpose of determining the Shareholders
of any Series (or class) who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than ninety (90) days before the date of any meeting of
Shareholders, as the record date for determining the Shareholders of such Series
(or class) having the right to notice of and to vote at such meeting and any
adjournment thereof, and in such case only Shareholders of record on such record
date shall have such right, notwithstanding any transfer of shares on the books
of the Trust after the record date. For the purpose of determining the
Shareholders of any Series (or class) who are entitled to receive payment of any
dividend or of any other distribution, the Trustees may from time to time fix a
date, which shall be before the date for the payment of such dividend or such
other payment, as the record date for determining the Shareholders of such
Series (or class) having the right to receive such dividend or distribution.
Without fixing a record date the Trustees may for voting and/or distribution
purposes close the register or transfer books for one or more Series for all or
any part of the period between a record date and a meeting of Shareholders or
the payment of a distribution. Nothing in this Section shall be construed as
precluding the Trustees from setting different record dates for different Series
(or classes).
SECTION 13. ADDITIONAL PROVISIONS. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE V.
Net Asset Value, Distributions, and Redemptions
SECTION 1. DETERMINATION OF NET ASSET VALUE, NET INCOME, AND DISTRIBUTIONS.
Subject to Article III, Section 6 hereof, the Trustees, in their absolute
discretion, may prescribe and shall set forth in the By-laws or in a duly
adopted vote of the Trustees such bases and time for determining the per Share
or net asset value of the Shares of any Series or net income attributable to the
Shares of any Series, or the declaration and payment of dividends and
distributions on the Shares of any Series, as they may deem necessary or
desirable.
SECTION 2. REDEMPTIONS AND REPURCHASES. The Trust shall purchase such
Shares as are offered by any Shareholder for redemption, upon the presentation
of a proper instrument of transfer together with a request directed to the Trust
or a Person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, in accordance with the By-Laws and applicable law. Payment for said
Shares shall be made by the Trust to the Shareholder within seven days after the
date on which the request is made in proper form. The obligation set forth in
this Section 2 is subject to the provision that in the event that any time the
New York Stock Exchange (the "Exchange") is closed for other than weekends or
holidays, or if permitted by the Rules of the Commission during periods when
trading on the Exchange is restricted or during any emergency which makes it
impracticable for the Trust to dispose of the investments of the applicable
Series or to determine fairly the value of the net assets held with respect to
such Series or during any other period permitted by order of the Commission for
the protection of investors, such obligations may be suspended or postponed by
the Trustees.
The redemption price may in any case or cases be paid wholly or partly in
kind if the Trustees determine that such payment is advisable in the interest of
the remaining Shareholders of the Series for which the Shares are being
redeemed. Subject to the foregoing, the fair value, selection and quantity of
securities or other property so paid or delivered as all or part of the
redemption price may be determined by or under authority of the Trustees. In no
case shall the Trust be liable for any delay of any corporation or other Person
in transferring securities selected for delivery as all or part of any payment
in kind.
SECTION 3. REDEMPTIONS AT THE OPTION OF THE TRUST. The Trust shall have the
right at its option and at any time to redeem Shares of any Shareholder at the
net asset value thereof as described in Section 1 of this Article VI: (i) if at
such time such Shareholder owns Shares of any Series having an aggregate net
asset value of less than an amount determined from time to time by the Trustees
prior to the acquisition of said Shares; or (ii) to the extent that such
Shareholder owns Shares of a particular Series equal to or in excess of a
percentage of the outstanding Shares of that Series determined from time to time
by the Trustees; or (iii) to the extent that such Shareholder owns Shares equal
to or in excess of a percentage, determined from time to time by the Trustees,
of the outstanding Shares of the Trust or of any Series.
ARTICLE VI.
Compensation and Limitation of Liability of Trustees
SECTION 1. COMPENSATION. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
SECTION 2. INDEMNIFICATION AND LIMITATION OF LIABILITY. The Trustees shall
not be responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, Manager or Principal Underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee,
and the Trust out of its assets shall indemnify and hold harmless each and every
Trustee from and against any and all claims and demands whatsoever arising out
of or related to each Trustee's performance of his or her duties as a Trustee of
the Trust; provided that nothing herein contained shall indemnify, hold harmless
or protect any Trustee from or against any liability to the Trust or any
Shareholder to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
SECTION 3. TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable to the Trust and to
any Shareholder solely for his or her own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice nor
for failing to follow such advice. The Trustees shall not be required to give
any bond as such, nor any surety if a bond is required.
SECTION 4. INSURANCE. The Trustees shall be entitled and empowered to the
fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee or officer in connection with any claim, action, suit or
proceeding in which he or she becomes involved by virtue of his or her capacity
or former capacity with the Trust, whether or not the Trust would have the power
to indemnify him or her against such liability under the provisions of this
Article.
ARTICLE VII.
Miscellaneous
SECTION 1. LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
SECTION 2. TERMINATION OF TRUST OR SERIES. Unless terminated as provided
herein, the Trust shall continue without limitation of time. The Trust may be
terminated at any time by vote of a majority of the Shares of each Series
entitled to vote, voting separately by Series, or by the Trustees by written
notice to the Shareholders. Any Series may be terminated at any time by vote of
a majority of the Shares of that Series or by the Trustees by written notice to
the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may be), after
paying or otherwise providing for all charges, taxes, expenses and liabilities
held, severally, with respect to each Series (or the applicable Series, as the
case may be), whether due or accrued or anticipated as may be determined by the
Trustees, the Trust shall, in accordance with such procedures as the Trustees
consider appropriate, reduce the remaining assets held, severally, with respect
to each Series (or the applicable Series, as the case may be), to distributable
form in cash or shares or other securities, or any combination thereof, and
distribute the proceeds held with respect to each Series (or the applicable
Series, as the case may be), to the Shareholders of that Series, as a Series,
ratably according to the number of Shares of that Series held by the several
Shareholders on the date of termination.
SECTION 3. MERGER AND CONSOLIDATION. The Trustees may cause (i) the Trust
or one or more of its Series to the extent consistent with applicable law to be
merged into or consolidated with another Trust or company, (ii) the Shares of
the Trust or any Series to be converted into beneficial interests in another
business trust (or series thereof) created pursuant to this Section 3 of Article
VIII, or (iii) the Shares to be exchanged under or pursuant to any state or
federal statute to the extent permitted by law. Such merger or consolidation,
Share conversion or Share exchange must be authorized by vote of a majority of
the outstanding Shares of the Trust, as a whole, or any affected Series, as may
be applicable; provided that in all respects not governed by statute or
applicable law, the Trustees shall have power to prescribe the procedure
necessary or appropriate to accomplish a sale of assets, merger or consolidation
including the power to create one or more separate business trusts to which all
or any part of the assets, liabilities, profits or losses of the Trust may be
transferred and to provide for the conversion of Shares of the Trust or any
Series into beneficial interests in such separate business trust or trusts (or
series thereof).
SECTION 4. AMENDMENTS. This Declaration of Trust may be restated and/or
amended at any time by an instrument in writing signed by a majority of the then
Trustees and, if required, by approval of such amendment by Shareholders in
accordance with Article V, Section 3 hereof. Any such restatement and/or
amendment hereto shall be effective immediately upon execution and approval. The
Certificate of Trust of the Trust may be restated and/or amended by a similar
procedure, and any such restatement and/or amendment shall be effective
immediately upon filing with the Office of the Secretary of State of the State
of Delaware or upon such future date as may be stated therein.
SECTION 5. FILING OF COPIES, REFERENCES, HEADINGS. The original or a copy
of this instrument and of each restatement and/or amendment hereto shall be kept
at the office of the Trust where it may be inspected by any Shareholder. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such restatements and/or amendments have been made and as
to any matters in connection with the Trust hereunder; and, with the same effect
as if it were the original, may rely on a copy certified by an officer of the
Trust to be a copy of this instrument or of any such restatements and/or
amendments. In this instrument and in any such restatements and/or amendment,
references to this instrument, and all expressions like "herein," "hereof" and
"hereunder," shall be deemed to refer to this instrument as amended or affected
by any such restatements and/or amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. Whenever the
singular number is used herein, the same shall include the plural; and the
neuter, masculine and feminine genders shall include each other, as applicable.
This instrument may be executed in any number of counterparts each of which
shall be deemed an original.
SECTION 6. APPLICABLE LAW. This Agreement and Declaration of Trust is
created under and is to be governed by and construed and administered according
to the laws of the State of Delaware and the Delaware Business Trust Act, as
amended from time to time (the "Act"). The Trust shall be a Delaware business
trust pursuant to such Act, and without limiting the provisions hereof, the
Trust may exercise all powers which are ordinarily exercised by such a business
trust.
SECTION 7. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of the Declaration of Trust are severable, and if the
Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of the Declaration of Trust; provided, however, that such determination
shall not affect any of the remaining provisions of the Declaration of Trust or
render invalid or improper any action taken or omitted prior to such
determination.
(b) If any provision of the Declaration of Trust shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration of Trust in any jurisdiction.
SECTION 8. BUSINESS TRUST ONLY. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Business Trust Act, as amended
from time to time (the "Act"), and thereby to create only the relationship of
trustee and beneficial owners within the meaning of such Act between the
Trustees and each Shareholder. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment, or any form of legal relationship other than a business
trust pursuant to such Act. Nothing in this Declaration of Trust shall be
construed to make the Shareholders, either by themselves or with the Trustees,
partners or members of a joint stock association.
SECTION 9. USE OF THE NAME "FRANKLIN". The name "Franklin" and all rights
to the use of the name "Franklin" belongs to Franklin Resources, Inc.
("Franklin"), the sponsor of the Trust. Franklin has consented to the use by the
Trust of the identifying word "Franklin" and has granted to the Trust a
non-exclusive license to use the name "Franklin" as part of the name of the
Trust and the name of any Series of Shares. In the event Franklin or an
affiliate of Franklin is not appointed as Manager and/or Principal Underwriter
or ceases to be the Manager and/or Principal Underwriter of the Trust or of any
Series using such names, the non-exclusive license granted herein may be revoked
by Franklin and the Trust shall cease using the name "Franklin" as part of its
name or the name of any Series of Shares, unless otherwise consented to by
Franklin or any successor to its interests in such names.
IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into
this Declaration of Trust as of the 18th day of September, 1995.
/s/ Frank H. Abbott, III /s/ Charles B. Johnson
Frank H. Abbott, III Charles B. Johnson
1045 Sansome Street 777 Mariners Island Blvd.
San Francisco, CA 94111 San Mateo, CA 94404
/s/ Harris J. Ashton /s/ Rupert H. Johnson, Jr.
Harris J. Ashton Rupert H. Johnson, Jr.
Metro Center, One Station Place 777 Mariners Island Blvd.
Stamford, CT 06904 San Mateo, CA 94404
/s/ S. Joseph Fortunato /s/ David W. Garbellano
S. Joseph Fortunato David W. Garbellano
Park Avenue at Morris County 111 New Montgomery St. #402
P.O. Box 1945 San Francisco, CA 94105
Morristown, NJ 07962-1945
/s/ Frank W.T. LaHaye /s/ Gordon S. Macklin
Frank W. T. LaHaye Gordon S. Macklin
20833 Stevens Creek Blvd. 8212 Burning Tree Road
Suite 102 Bethesda, MD 20817
Cupertino, CA 95014
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 777 Mariners Island Boulevard,
San Mateo, California 94404
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN TEMPLETON FUND MANAGER
The undersigned certify that:
1. They constitute a majority of the Board of Trustees of Franklin
Templeton Fund Manager, a Delaware business trust (the "Trust").
2. They hereby adopt the following amendment to the Agreement and
Declaration of Trust of the Trust (the "Declaration of Trust"):
Article I, Section 1 is hereby amended to read as follows:
SECTION 1. NAME. This trust shall be known as "Franklin Templeton Fund
Allocator Series" and the Trustees shall conduct the business of the
Trust under that name or any other name as they may from time to time
determine.
3. This amendment is made pursuant to Article VIII, Section 4 of the
Declaration of Trust which empowers the Trustees to restate and/or amend
such Declaration of Trust at any time by an instrument in writing signed
by a majority of the then Trustees.
IN WITNESS WHEREOF, the Trustees named below do hereby set their hands as
of the 17th day of September, 1996.
/s/ HARRIS J. ASHTON
Frank H. Abbott III Harris J. Ashton
/s/ S. JOSEPH FORTUNATO /s/ DAVID W. GARBELLANO
S. Joseph Fortunato David W. Garbellano
/s/ CHARLES B. JOHNSON
Charles B. Johnson Rupert H. Johnson, Jr.
/s/ FRANK W.T. LAHAYE
Frank W.T. LaHaye Gordon S. Macklin
CERTIFICATE OF TRUST
OF
FRANKLIN TEMPLETON FUND MANAGER
a Delaware Business Trust
THIS Certificate of Trust of the FRANKLIN TEMPLETON FUND MANAGER (the
"Trust"), dated as of this 18th day of September, 1995, is being duly executed
and filed, in order to form a business trust pursuant to the Delaware Business
Trust Act (the "Act"), Del. Code Ann. tit. 12, ss.ss.3801-3819.
1. NAME. The name of the business trust formed hereby is "FRANKLIN
TEMPLETON FUND MANAGER."
2. REGISTERED OFFICE AND REGISTERED AGENT. The Trust will become, prior to
the issuance of beneficial interests, a registered investment company under the
Investment Company Act of 1940, as amended. Therefore, in accordance with
section 3807(b) of the Act, the Trust has and shall maintain in the State of
Delaware a registered office and a registered agent for service of process.
(a) REGISTERED OFFICE. The registered office of the Trust in
Delaware is The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801.
(b) REGISTERED AGENT. The registered agent for service of process
on the Trust in Delaware is The Corporation Trust Company.
3. LIMITATION ON LIABILITY. Pursuant to section 3804 of the Act, in the
event that the Trust's governing instrument, as defined in section 3801(f) of
the Act, creates one or more series as provided in section 3806(b)(2) of the
Act, the debts, liabilities, obligations and expenses incurred, contracted for
or otherwise existing with respect to a particular series of the Trust shall be
enforceable against the assets of such series only, and not against the assets
of the Trust generally.
IN WITNESS WHEREOF, the Trustees named below do hereby execute this
Certificate of Trust as of the date first-above written.
/s/ FRANK H. ABBOTT, III /s/ CHARLES B. JOHNSON
Frank H. Abbott, III Charles B. Johnson
1045 Sansome Street 777 Mariners Island Blvd.
San Francisco, CA 94111 San Mateo, CA 94404
/s/ HARRIS J. ASHTON /s/ RUPERT H. JOHNSON, JR.
Harris J. Ashton Rupert H. Johnson, Jr.
Metro Center, 1 Station Place 777 Mariners Island Blvd.
Stamford, CT 06904 San Mateo, CA 94404
/s/ S. JOSEPH FORTUNATO /s/ DAVID W. GARBELLANO
S. Joseph Fortunato David W. Garbellano
Park Avenue at Morris County 111 New Montgomery St. #402
P.O. Box 1945 San Francisco, CA 94105
Morristown, NJ 07962-1945
/s/ FRANK W.T. LAHAYE /s/ GORDON S. MACKLIN
Frank W. T. LaHaye Gordon S. Macklin
20833 Stevens Creek Blvd. 8212 Burning Tree Road
Suite 102 Bethesda, MD 20817
Cupertino, CA 95014
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF TRUST
OF
FRANKLIN TEMPLETON FUND MANAGER
The undersigned certifies that:
1. The name of the business trust is Franklin Templeton Fund Manager (the
"Business Trust").
2. The amendment to the Certificate of Trust of the Business Trust set forth
below (the "Amendment") has been duly authorized by the Board of Trustees
of the Business Trust.
The First Article of the Certificate of Trust is hereby amended to read as
follows:
1. NAME. The name of the business trust is "Franklin Templeton Fund
Allocator Series."
3. Pursuant to section 3810(b)(3) of the Delaware Business Trust Act, Del.
Code Ann. tit. 12, sec. 3801-3819 (the "Act"), this Certificate of
Amendment to the Certificate of Trust of the Business Trust shall become
effective immediately upon filing with the Office of the Secretary of State
of the State of Delaware.
4. The Amendment is made pursuant to the authority granted to the Trustees of
the Business Trust under Section 3810(b) of the Act and pursuant to the
authority set forth in the governing instrument of the Business Trust.
IN WITNESS WHEREOF, the undersigned, being a trustee of the Business Trust,
has duly executed this Certificate of Amendment this 17th day of September,
1996.
/s/ CHARLES B. JOHNSON
Charles B. Johnson
BY-LAWS
OF
FRANKLIN TEMPLETON FUND MANAGER
A Delaware Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and, from time
to time, may change the location of the principal executive office of the Trust
at any place within or outside the State of Delaware.
Section 2. OTHER OFFICES. The Board of Trustees may at any time establish
branch or subordinate offices at any place or places where the Trust intends to
do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section I. PLACE OF MEETINGS. Meetings of shareholders shall be held at any
place within or outside the State of Delaware designated by the Board of
Trustees. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be called at
any time by the Board of Trustees or by the Chairman of the Board or by the
president.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than seven (7) nor more than seventy-five (75) days
before the date of the meeting. The notice shall specify (i) the place, date and
hour of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which trustees are to be elected also
shall include the name of any nominee or nominees whom at the time of the notice
are intended to be presented for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a trustee has a direct or indirect financial
intIerest, (ii) an amendment of the Declaration of Trust, (iii) a reorganization
of the Trust, or (iv) a voluntary dissolution of the Trust, the notice shall
also state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the Trust is returned to the Trust by the United
States Postal Service marked to indicate that the Postal Service is unable to
deliver the notice to the shareholder at that address, all future notices or
reports shall be deemed to have been duly given without further mailing if these
shall be available to the shareholder on written demand of the shareholder at
the principal executive office of the Trust for a period of one year from the
date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholder's meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the Trust giving the notice and shall be filed and
maintained in the minute book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting, whether or
not a quorum is present, may be adjourned from time to time by the vote of the
majority of the shares represented at that meeting, either in person or by
proxy.
When any meeting of shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new record date. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 3 and 4 of this Article II. At any adjourned meeting, the Trust may
transact any business which might have been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of the
Declaration of Trust, as in effect at such time. The shareholders' vote may be
by voice vote or by ballot, provided, however, that any election for trustees
must be by ballot if demanded by any shareholder before the voting has begun. On
any matter other than elections of trustees, any shareholder may vote part of
the shares in favor of the proposal and refrain from voting the remaining shares
or vote them against the proposal, but if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
the total shares that the shareholder is entitled to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of shareholders.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing setting forth the
action so taken is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action
were present and voted. All such consents shall be filed with the Secretary of
the Trust and shall be maintained in the Trust's records. Any shareholder giving
a written consent or the shareholder's proxy holders or a transferee of the
shares or a personal representative of the shareholder or their respective proxy
holders may revoke the consent by a writing received by the Secretary of the
Trust before written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II. in the
case of approval of (i) contracts or transactions in which a trustee has a
direct or indirect financial interest, (ii) indemnification of agents of the
Trust, and (iii) a reorganization of the Trust, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE; VOTING AND GIVING CONSENTS.
For purposes of determining the shareholders entitled to notice of any meeting
or to vote or entitled to give consent to action without a meeting, the Board of
Trustees may fix in advance a record date which shall not be more than ninety
(90) days nor less than seven (7) days before the date of any such meeting as
provided in the Declaration of Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give consent
to action in writing without a meeting, (i) when no prior action by the Board of
Trustees has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the Board of Trustees has been taken, shall
be at the close of business on the day an which the Board of Trustees adopt the
resolution relating to that action or the seventy-fifth day before the date of
such other action, whichever is later.
Section 10. PROXIES. Every person entitled to vote for trustees or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the Trust. A proxy shall be deemed signed if the shareholder's name
is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it before the vote pursuant to that proxy by a writing
delivered to the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in person by the
person executing that proxy; or (ii) written notice of the death or incapacity
of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted; provided however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless otherwise
provided in the proxy. The revocability of a proxy that states on its face that
it is irrevocable shall be governed by the provisions of the General Corporation
Law of the State of California.
Section 11. INSPECTORS OF ELECTION. Before any meeting of shareholders, the
Board of Trustees may appoint any persons other than nominees for office to act
as inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the chairman of the meeting may and on the request of
any shareholder or a shareholder's proxy shall, appoint inspectors of election
at the meeting. The number of inspectors shall be either one (1) or three (3).
If inspectors are appointed at a meeting on the request of one or more
shareholders or proxies, the holders of a majority of shares or their proxies
present at the meeting shall determine whether one (1) or three (3) inspectors
are to be appointed. If any person appointed as inspector fails to appear or
fails or refuses to act, the chairman of the meeting may and on the request of
any shareholder or a shareholder's proxy, shall appoint a person to fill the
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum and
the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
TRUSTEES
Section 1. POWERS. Subject to the applicable provisions of the Declaration
of Trust and these By-Laws relating to action required to be approved by the
shareholders or by the outstanding shares, the business and affairs of the Trust
shall be managed and all powers shall be exercised by or under the direction of
the Board of Trustees.
Section 2. NUMBER AND QUALIFICATION OF TRUSTEES. The exact number of
trustees shall be set forth in the Agreement and Declaration of Trust, until
changed by a duly adopted amendment to the Declaration of Trust.
Section 3. VACANCIES. Vacancies in the Board of Trustees may be filled by a
majority of the remaining trustees, though less than a quorum, or by a sole
remaining trustee, unless the Board of Trustees calls a meeting of shareholders
for the purposes of electing trustees. In the event that at any time less than a
majority of the trustees holding office at that time were so elected by the
holders of the outstanding voting securities of the Trust, the Board of Trustees
shall forthwith cause to be held as promptly as possible, and in any event
within sixty (60) days, a meeting of such holders for the purpose of electing
trustees to fill any existing vacancies in the Board of Trustees, unless such
period is extended by order of the United States Securities and Exchange
Commission.
Notwithstanding the above, whenever and for so long as the Trust is a
participant in or otherwise has in effect a Plan under which the Trust may be
deemed to bear expenses of distributing its shares as that practice is described
in Rule 12b-1 under the Investment Company Act of 1940, then the selection and
nomination of the trustees who are not interested persons of the Trust (as that
term is defined in the Investment Company Act of 1940) shall be, and is,
committed to the discretion of such disinterested trustees.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of the
Board of Trustees may be held at any place within or outside the State of
Delaware that has been designated from time to time by resolution of the Board.
In the absence of such a designation, regular meetings shall be held at the
principal executive office of the Trust. Any meeting, regular or special, may be
held by conference telephone or similar communication equipment, so long as all
trustees participating in the meeting can hear one another and all such trustees
shall be deemed to be present in person at the meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Trustees
shall be held without call at such time as shall from time to time be fixed by
the Board of Trustees. Such regular meetings nay be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Trustees for
any purpose or purposes nay be called at any time by the chairman of the board
or the president or any vice president or the secretary or any two (2) trustees.
Notice of the tine and place of special meetings shall be delivered
personally or by telephone to each trustee or sent by first-class mail or
telegram, charges prepaid, addressed to each trustee at that trustee's address
as it is shown on the records of the Trust. In case the notice is mailed, it
shall be deposited in the United States mail at least seven (7) days before the
time of the holding of the meeting. In case the notice is delivered personally,
by telephone, to the telegraph company, or by express mail or similar service,
it shall be given at least forty-eight (48) hours before the time of the holding
of the meeting. Any oral notice given personally or by telephone may be
communicated either to the trustee or to a person at the office of the trustee
who the person giving the notice has reason to believe will promptly communicate
it to the trustee. The notice need not specify the purpose of the meeting or the
place if the meeting is to be held at the principal executive office of the
Trust.
Section 7. QUORUM. A majority of the authorized number of trustees shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of the trustees present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Trustees, subject to the
provisions of the Declaration of Trust. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
trustees if any action taken is approved by a least a majority of the required
quorum for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to any
trustee who either before or after the meeting signs a written waiver of notice,
a consent to holding the meeting, or an approval of the minutes. The waiver of
notice or consent need not specify the purpose of the meeting. All such waivers,
consents, and approvals shall be filed with the records of the Trust or made a
part of the minutes of the meeting. Notice of a meeting shall also be deemed
given to any trustee who attends the meeting without protesting before or at its
commencement the lack of notice to that trustee.
Section 9. ADJOURNMENT. A majority of the trustees present, whether or not
constituting a quorum, may adjourn any meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given unless the meeting is adjourned for more
than forty-eight (48) hours, in which case notice of the time and place shall be
given before the time of the adjourned meeting in the manner specified in
Section 7 of this Article III to the trustees who were present at the time of
the adjournment.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Board of Trustees may be taken without a meeting if a majority
of the members of the Board of Trustees shall individually or collectively
consent in writing to that action. Such action by written consent shall have the
same force and effect as a majority vote of the Board of Trustees. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may he fixed or determined by resolution of the
Board of Trustees. This Section 12 shall not be construed to preclude any
trustee from serving the Trust in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation for those services.
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two (2) Trustees personally exercise the powers granted to the
Trustees under this Declaration of Trust except as otherwise expressly provided
herein or by resolution of the Board of Trustees.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may by resolution
adopted by a majority of the authorized number of trustees designate one or more
committees, each consisting of two (2) or more trustees, to serve at the
pleasure of the Board. The Board may designate one or more trustees as alternate
members of any committee who may replace any absent member at any meeting of the
committee. Any committee to the extent provided in the resolution of the Board,
shall have the authority of the Board, except with respect to:
(a) the approval of any action which under applicable law also
requires shareholders' approval or approval of the outstanding shares, or
requires approval by a majority of the entire Board or certain members of
said Board;
(b) the filling of vacancies on the Board of Trustees or in any
committee;
(c) the fixing of compensation of the trustees for serving on the
Board of Trustees or on any committee;
(d) the amendment or repeal of the Declaration of Trust or of the
By-Laws or the adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the Board of Trustees
which by its express terms is not so amenable or repealable;
(f) a distribution to the shareholders of the Trust, except at a rate
or in a periodic amount or within a designated range determined by the
Board of Trustees; or
(g) the appointment of any other committees of the Board of Trustees
or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board of Trustees and its members, except that the time of regular meetings of
committees may be determined either by resolution of the Board of Trustees or by
resolution of the committee. Special meetings of committees may also be called
by resolution of the Board of Trustees, and notice of special meetings of
committees shall also be given to all alternate members who shall have the right
to attend all meetings of the committee. The Board of Trustees may adopt rules
for the government of any committee not inconsistent with the provisions of
these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a president, a
secretary, and a treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the Trust, except such
officers as may appointed in accordance with the provisions of Section 3 or
Section 5 of this Article V, shall be chosen by the Board of Trustees, and each
shall serve at the pleasure of the Board of Trustees, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint and may
empower the president to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contrast of employment, any officer may be removed,
either with or without cause, by the Board of Trustees at any regular or special
meeting of the Board of Trustees or except in the case of an officer upon whom
such power of removal may be conferred by the Board of Trustees.
Any officer may resign at any time by giving written notice to the Trust.
Any resignation shall take effect at the date of the receipt of that notice or
at any later time specified in that notice; and unless otherwise specified in
that notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Trust under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death,
resignation, removal, disqualification or other cause shall be filled in the
manner prescribed in these By-Laws for regular appointment to that office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer is elected, shall if present preside at meetings of the Board of
Trustees and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Trustees or prescribed by the
By-Laws.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be
given by the Board of Trustees to the chairman of the board, if there be such an
officer, the president shall be the chief executive officer of the Trust and
shall, subject to the control of the Board of Trustees, have general
supervision, direction and control of the business and the officers of the
Trust. He shall preside at all meetings of the shareholders and in the absence
of the chairman of the board or if there be none, at all meetings of the Board
of Trustees. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Trustees or these
By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the Board of
Trustees or if not ranked, a vice president designated by the Board of Trustees,
shall perform all the duties of the president and when so acting shall have all
powers of and be subject to all the restrictions upon the president. The vice
presidents shall have such other powers and perform such other duties as from
time to tine may be prescribed for them respectively by the Board of Trustees or
by these By-Laws and the president or the chairman of the board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept at the
principal executive office of the Trust or such other place as the Board of
Trustees may direct a book of minutes of all meetings and actions of trustees,
committees of trustees and shareholders with the time and place of holding,
whether regular or special, and if special, how authorized, the notice given,
the names of those present at trustees' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings.
The secretary shall keep or cause to be kept at the principal executive
office of the Trust or at the office of the Trust's transfer agent or registrar,
as determined by resolution of the Board of Trustees, a share register or a
duplicate share register showing the names of all shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings of the
shareholders and of the Board of Trustees required by these By-Laws or by
applicable law to be given and shall have such other powers and perform such
other duties as may be prescribed by the Board of Trustees or by these By-Laws.
Section 10. TREASURER. The treasurer shall be the chief financial officer
of the Trust and shall keep and maintain or cause to be kept and maintained
adequate and correct books and records of accounts of the properties and
business transactions of the Trust, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any trustee.
The treasurer shall deposit all monies and ether valuables in the name and
to the credit of the Trust with such depositories as may be designated by the
Board of Trustees. He shall disburse the funds of the Trust as nay be ordered by
the Board of Trustees, shall render to the president and trustees, whenever they
request it, an account of all of his transactions as chief financial officer and
of the financial condition of the Trust and shall have other powers and perform
such other duties as may be prescribed by the Board of Trustees or these
By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES, OFFICERS
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes without limitation attorney's fees and any expenses of
establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in the best interests of this Trust
and in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of that person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the person did not act
in good faith and in a manner which the person reasonably believed to be in the
best interests of this Trust or that the person had reasonable cause to believe
that the person's conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action by or in the right of this Trust to procure a judgment in
its favor by reason of the fact that the person is or was an agent of this
Trust, against expenses actually and reasonably incurred by that person in
connection with the defense or settlement of that action if that person acted in
good faith, in a manner that person believed to be in the best interests of this
Trust and with such care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to
the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue or matter as to which that person shall
have been adjudged to be liable in the performance of that person's duty to this
Trust, unless and only to the extent that the court in which that action was
brought shall determine upon application that in view of all the circumstances
of the case, that person was not liable by reason of the disabling conduct set
forth in the preceding paragraph and is fairly and reasonably entitled to
indemnity for the expenses which the court shall determine; or
(b) In respect of any claim, issue, or matter as to which that person shall
have been adjudged to be liable on the basis that personal benefit was
improperly received by him, whether or not the benefit resulted from an action
taken in the person's official capacity; or
(c) Of amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval, or of expenses incurred in
defending a threatened or pending action which is settled or otherwise disposed
of without court approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this
Trust has been successful on the merits in defense of any proceeding referred to
in Sections 2 or 3 of this Article or in defense of any claim, issue or matter
therein, before the court or other body before whom the proceeding was brought,
the agent shall be indemnified against expenses actually and reasonably incurred
by the agent in connection therewith, provided that the Board of Trustees,
including a majority who are disinterested, non-party trustees, also determines
that based upon a review of the facts, the agent was not liable by reason of the
disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of trustees who are not
parties to the proceeding and are not interested persons of the Trust (as
defined in the Investment Company Act of 1940); or
(b) A written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding on receipt of an undertaking by or on behalf of the agent to repay
the amount of the advance unless it shall be determined ultimately that the
agent is entitled to be indemnified as authorized in this Article, provided the
agent provides a security for his undertaking, or a majority of a quorum of the
disinterested, non-party trustees, or an independent legal counsel in a written
opinion, determine that based on a review of readily available facts, there is
reason to believe that said agent ultimately will be found entitled to
indemnification.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than trustees
and officers of this Trust or any subsidiary hereof nay be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made under
this Article, except as provided in Sections 5 or 6 in any circumstances where
it appears:
(a) That it would be inconsistent with a provision of the Agreement
and Declaration of Trust, a resolution of the shareholders, or an agreement
in effect at the time of accrual of the alleged cause of action asserted in
the proceeding in which the expenses were incurred or other amounts were
paid which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any trustee, investment manager or other
fiduciary of an employee benefit plan in that person' s capacity as such, even
though that person nay also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust shall
keep at its principal executive office or at the office of its transfer agent or
registrar, if either be appointed and as determined by resolution of the Board
of Trustees, a record of its shareholders, giving the names and addresses of all
shareholders and the number and series of shares held by each shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep at
its principal executive office the original or a copy of these By-Laws as
amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the Board
of Trustees and any committee or committees of the Board of Trustees shall be
kept at such place or places designated by the Board of Trustees or in the
absence of such designation, at the principal executive office of the Trust. The
minutes shall be kept in written form and the accounting books and records shall
be kept either in written form or in any other form capable of being converted
into written form. The minutes and accounting books and records shall be open to
inspection upon the written demand of any shareholder or holder of a voting
trust certificate at any reasonable time during usual business hours for a
purpose reasonably related to the holder's interests as a shareholder or as the
holder of a voting trust certificate. The inspection may be made in person or by
an agent or attorney and shall include the right to copy and make extracts.
Section 4. INSPECTION BY TRUSTEES. Every trustee shall have the absolute
right at any reasonable time to inspect all books, records, and documents of
every kind and the physical properties of the Trust. This inspection by a
trustee may be made in person or by an agent or attorney and the right of
inspection includes the right to copy and make extracts of documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial statements and any
income statement of the Trust for each quarterly period of each fiscal year and
accompanying balance sheet of the Trust as of the end of each such period that
has been prepared by the Trust shall be kept on file in the principal executive
office of the Trust for at least twelve (12) months and each such statement
shall be exhibited at all reasonable times to any shareholder demanding an
examination of any such statement or a copy shall be mailed to any such
shareholder.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
ARTICLE VIII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts, or
other orders for payment of money, notes or other evidences of indebtedness
issued in the name of or payable to the Trust shall be signed or endorsed by
such person or persons and in such manner as from time to time shall be
determined by resolution of the Board of Trustees.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Trustees,
except as otherwise provided in these By-Laws, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the Trust and this authority may be general or
confined to specific instances; and unless so authorized or ratified by the
Board of Trustees or within the agency power of an officer, no officer, agent,
or employee shall have any power or authority to bind the Trust by any contract
or engagement or to pledge its credit or to render it liable for any purpose or
for any amount.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust may be issued to a
shareholder upon his request when such shares are fully paid. All certificates
shall be signed in the name of the Trust by the chairman of the board or the
president or vice president and by the treasurer or an assistant treasurer or
the secretary or any assistant secretary, certifying the number of shares and
the series of shares owned by the shareholders. Any or all of the signatures on
the certificate may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to be that officer, transfer agent, or registrar
before that certificate is issued, it may be issued by the Trust with the same
effect as if that person were an officer, transfer agent or registrar at the
date of issue. Notwithstanding the foregoing, the Trust may adopt and use a
system of issuance, recordation and transfer of its shares by electronic or
other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no new
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered to the Trust and cancelled at the same time. The Board of
Trustees may in case any share certificate or certificate for any other security
is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board of Trustees may require,
including a provision for indemnification of the Trust secured by a bond or
other adequate security sufficient to protect the Trust against any claim that
may be made against it, including any expense or liability on account of the
alleged loss, theft, or destruction of the certificate or the issuance of the
replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The
chairman of the board, the president or any vice president or any other person
authorized by resolution of the Board of Trustees or by any of the foregoing
designated officers, is authorized to vote or represent on behalf of the Trust
any and all shares of any corporation, partnership, trusts, or other entities,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by resolution of the Trustees. The fiscal
year of the Trust shall be the taxable year of each Series of the Trust.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended or
repealed by the affirmative vote or written consent of a majority of the
outstanding shares entitled to vote, except as otherwise provided by applicable
law or by the Declaration of Trust or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of shareholders as
provided in Section 1 of this Article to adopt, amend or repeal By-Laws, and
except as otherwise provided by law or by the Declaration of Trust, these
By-Laws may be adopted, amended, or repealed by the Board of Trustees.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
on behalf of its series
Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Aggressive 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 ____ day of ____________.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By: ___________________________
FRANKLIN ADVISERS, INC.
By: ___________________________
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:____________________________
[NAME]
[TITLE]
Accepted:
Franklin/Templeton Distributors, Inc.
By:_____________________________
[NAME]
[TITLE]
DATED:_______________
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 Aggressive
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: _______________________
[NAME]
[TITLE]
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: _______________________
[NAME]
[TITLE]
[DATE]
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 Aggressive
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: __________________
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By:_________________________
[NAME]
[TITLE]
Franklin/Templeton Distributors, Inc.
By:_________________________
[NAME]
[TITLE]
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN TEMPLETON FUND MANAGER
(the "Registrant"), hereby appoint MARK H. PLAFKER, HARMON E BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE(with full power to each of them to
act alone) as attorney-in-fact and agent, in all capacities, to execute, and to
file any of the documents referred to below relating to the Notification of
Registration on Form N-8A registering the Registrant as an investment company
under the Investment Company Act of 1940, as amended, and the Registrant's
registration statement on Form N-1A under the Investment Company Act of 1940, as
amended, and under the Securities Act of 1933, including any and all amendments
thereto, covering the registration of the Registrant as an investment company
and the sale of shares by the Registrant, including all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, including applications for exemptive order rulings. Each of the
undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes, as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 18th day of September, 1995.
/s/ Rupert H. Johnson, Jr. /s/ Charles B. Johnson
Rupert H. Johnson, Jr., Charles B. Johnson,
Principal Executive Officer Trustee
and Trustee
/s/ Frank H. Abbot, III /s/ Harris J. Ashton
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/s/ S. Joseph Fortunato /s/ David W. Garbellano
S. Joseph Fortunato, David W. Garbellano,
Trustee Trustee
/s/ Frank W. T. LaHaye /s/ Gordon S. Macklin
Frank W. T. LaHaye, Gordon S. Macklin,
Trustee Trustee
/s/ Martin L. Flanagan /s/ Diomedes Loo-Tam
Martin L. Flanagan, Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting
Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of FRANKLIN TEMPLETON FUND
MANAGER (the "Trust").
As Secretary of the Trust, I further certify that the following resolution was
adopted by a majority of the Trustees of the Trust present at a meeting held at
777 Mariners Island Boulevard, San Mateo, California, on September 18, 1995.
RESOLVED, that a Power of Attorney, substantially in the form of the
Power of Attorney presented to this Board, appointing Mark H. Plafker,
Harmon E. Burns, Deborah R. Gatzek, Karen L. Skidmore and Larry L.
Greene as attorneys-in-fact for the purpose of filing documents with
the Securities and Exchange Commission, be executed by a majority of
the Trustees and designated officers.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: September 18, 1995 /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
[FORM]
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 _______________, 1996.
__________________________
Deborah R. Gatzek
Secretary
