As filed with the Securities and Exchange Commission on November 28, 1997
File Nos.
811-7851
333-13601
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 2 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4 (X)
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of
Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on December 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph(a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
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 "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description of "How is the Trust Organized?"; "How
Registrant does the Fund Invest its Assets?";
"What are the Fund's Potential
Risks?"; "How Do the Underlying
Funds Invest their Assets?"; "What
are the Underlying Funds' Potential
Risks?"; "What are some of the Other
Investment Policies and Strategies
of, and Risks of an Investment in
the Underlying Funds?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?"; "What
Securities Distributions Might I Receive from
the Fund?"; "Taxes"; "How Do I Buy
Shares?"; "Services to Help You
Manage Your Account"
7. Purchase of Securities Being Cover Page; "How Do I Buy Shares?";
Offered "May I Exchange Shares for Shares of
Another Fund?"; "Who Manages the
Fund?"; "Transaction Procedures and
Special Requirements"
8. Redemption or Repurchase "How Do I Sell Shares?"; "May I
Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help You
Manage Your Account"
9. Legal Proceedings Not Applicable
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
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 Table of Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment Restrictions"
14. Management of the Registrant "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Miscellaneous Information"
16. Investment Advisory and Other "Investment Advisory, Asset
Services Allocation and Other Services"; "The
Fund's Underwriter"
17. Brokerage Allocation "How does the Fund Buy Securities
For its Portfolio?"
18. Capital Stock and Other See Prospectus -- "How is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How does the Fund Measure
Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
DECEMBER 1, 1997
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
FRANKLIN TEMPLETON MODERATE TARGET FUND
FRANKLIN TEMPLETON GROWTH TARGET FUND
INVESTMENT STRATEGY
GROWTH & INCOME
This prospectus describes the three series of Franklin Templeton Fund Allocator
Series (the "Trust"). Each series offers two classes of shares.
Each Fund may individually or together be referred to as the "Fund(s)." This
prospectus contains information you should know before investing in the Fund.
Please keep it for future reference.
The Trust has a Statement of Additional Information ("SAI") dated December 1,
1997, which may be amended from time to time. It includes more information about
the Trust's procedures and policies. It has been filed with the SEC and is
incorporated by reference into this prospectus. For a free copy or a larger
print version of this prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUNDS 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 FUNDS 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, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ........................................................... 2
Financial Highlights ...................................................... 4
How does the Fund Invest its Assets? ...................................... 8
What are the Fund's Potential Risks? ...................................... 13
How Do the Underlying Funds Invest their Assets? .......................... 14
What are the Underlying Funds' Potential Risks? ........................... 52
Who Manages the Fund? ..................................................... 56
How does the Fund Measure Performance? .................................... 61
Taxes ..................................................................... 61
How is the Trust Organized? ............................................... 65
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ...................................................... 66
May I Exchange Shares for Shares of Another Fund? ......................... 72
How Do I Sell Shares? ..................................................... 75
What Distributions Might I Receive from the Fund? ......................... 78
Transaction Procedures and Special Requirements ........................... 79
Services to Help You Manage Your Account .................................. 84
What If I Have Questions About My Account? ................................ 86
GLOSSARY
Useful Terms and Definitions .............................................. 86
APPENDICES
What are some of the Other Investment Policies and Strategies of,
and Risks of an Investment in, the Underlying Funds? ..................... 89
Description of Ratings ....................................................109
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
DECEMBER 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in each
Fund. The expenses are estimates based upon anticipated fees and expenses for
the fiscal year ending July 31, 1998. The Fund's actual expenses may vary.
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price)++ 4.50% 4.50% 4.50%
Paid at time of redemption+++ None None None
Exchange Fee (per transaction)* $5.00 $5.00 $5.00
CLASS II
Maximum Sales Charges
(as a percentage of Offering Price) 1.99% 1.99% 1.99%
Paid at time of purchase ++++ 1.00% 1.00% 1.00%
Paid at redemption+++ 0.99% 0.99% 0.99%
Exchange Fee (per transaction)* $5.00 $5.00 $5.00
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Asset Allocation Fees** 0.00% 0.00% 0.00%
Rule 12b-1 Fees*** 0.25% 0.25% 0.25%
Other Expenses** 0.50% 0.50% 0.50%
Management Fees of the Underlying Funds 0.57% 0.59% 0.60%
Other Expenses of the Underlying Funds 0.23% 0.25% 0.33%
Total Fund Operating Expenses** 1.55% 1.59% 1.68%
CLASS II
Asset Allocation Fees** 0.00% 0.00% 0.00%
Rule 12b-1 Fees*** 1.00% 1.00% 1.00%
Other Expenses** 0.50% 0.50% 0.50%
Management Fees of the Underlying Funds 0.57% 0.59% 0.60%
Other Expenses of the Underlying Funds 0.23% 0.25% 0.33%
Total Fund Operating Expenses** 2.30% 2.34% 2.43%
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $1,000 that you invest in the Fund.
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
CLASS I
One Year**** ............. $60 $60 $61
Three Years ............. $92 $93 $96
CLASS II
One Year ............. $43 $43 $44
Three Years ............. $81 $82 $85
For the same Class II investment, you would pay projected expenses of $33
(Conservative Target Fund), $33 (Moderate Target Fund), and $34 (Growth Target
Fund) if you did not sell your shares at the end of the first year. Your
projected expenses for the three-year period 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.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in Class
I shares.
+++A Contingent Deferred Sales Charge may apply to any Class II purchase if you
sell the shares within 18 months and to Class I purchases of $1 million or more
if you sell the shares within one year. A Contingent Deferred Sales Charge may
also apply to purchases by certain retirement plans that qualify to buy Class I
shares without a front-end sales charge. The charge is 1% of the value of the
shares sold or the Net Asset Value at the time of purchase, whichever is less.
The number in the table shows the charge as a percentage of Offering Price.
While the percentage is different depending on whether the charge is shown
based on the Net Asset Value or the Offering Price, the dollar amount paid by
you would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
++++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? - Choosing a Share Class."
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**With respect to each Fund, Advisers has agreed in advance to limit the asset
allocation fee and/or make certain payments to reduce the Fund's direct
operating expenses so that each Fund's direct operating expenses do not exceed
0.75% for Class I shares and 1.50% for Class II shares. Absent this agreement,
it is estimated that each Fund's Asset Allocation Fee would be 0.25% and total
direct Fund operating expenses would be as follows: Conservative Target Fund
3.80% for Class I and 4.55% for Class II; Moderate Target Fund 1.34% for Class
I and 2.09% for Class II; and Growth Target Fund 2.21% for Class I and 2.96%
for Class II. After July 31, 1998, Advisers may end this arrangement at any
time. The Funds will also indirectly bear their pro rata share of the expenses
of the Underlying Funds in which they invest.
***These fees may not exceed 0.25% for Class I shares and 1.00% for Class II
shares. The combination of front-end sales charges and Rule 12b-1 fees could
cause long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the period shown below appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended July 31,
1997. The Annual Report to Shareholders also includes more information about the
Fund's performance. For a free copy, please call Fund Information.
CONSERVATIVE TARGET FUND: CLASS I SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
Net Investment Income . .12
Net Realized & Unrealized Gain on Securities . .80
Total From Investment Operations .92
Distributions From Net Investment Income (.05)
Total Distributions (.05)
Net Asset Value at End of Period $10.87
Total Return+ 9.21%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $1,609
Ratio of Expenses to Average Net Assets++ 0.59%**
Ratio of Net Investment Income to Average Net Assets 3.93%**
Portfolio Turnover Rate 33.30%
CONSERVATIVE TARGET FUND: CLASS II SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
Net Investment Income .10
Net Realized & Unrealized Gain on Securities .75
Total From Investment Operations .85
Distributions From Net Investment Income (.04)
Total Distributions (.04)
Net Asset Value at End of Period $10.81
Total Return+ 8.48%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $3,010
Ratio of Expenses to Average Net Assets++ 1.48%**
Ratio of Net Investment Income to Average Net Assets 3.04%**
Portfolio Turnover Rate 33.30%
MODERATE TARGET FUND: CLASS I SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
Net Investment Income .17
Net Realized & Unrealized Gain on Securities 1.13
Total From Investment Operations 1.30
Distributions From Net Investment Income (.04)
Total Distributions (.04)
Net Asset Value at End of Period $11.26
Total Return+ 13.05%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $6,498
Ratio of Expenses to Average Net Assets++ 0.67%**
Ratio of Net Investment Income to Average Net Assets 2.69%**
Portfolio Turnover Rate 264.78%
MODERATE TARGET FUND: CLASS II SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
Net Investment Income .07
Net Realized & Unrealized Gain on Securities 1.11
Total From Investment Operations 1.18
Distributions From Net Investment Income (.02)
Total Distributions (.02)
Net Asset Value at End of Period $11.16
Total Return+ 11.84%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $4,695
Ratio of Expenses to Average Net Assets++ 1.50%**
Ratio of Net Investment Income to Average Net Assets 1.86%**
Portfolio Turnover Rate 264.78%
GROWTH TARGET FUND: CLASS I SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
Net Investment Income .05
Net Realized & Unrealized Gain on Securities 1.28
Total From Investment Operations 1.33
Distributions From Net Investment Income -
Total Distributions -
Net Asset Value at End of Period $11.33
Total Return+ 13.30%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $9,638
Ratio of Expenses to Average Net Assets++ 0.73%**
Ratio of Net Investment Income to Average Net Assets 2.65%**
Portfolio Turnover Rate 65.52%
GROWTH TARGET FUND: CLASS II SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period $10.00
Net Investment Income .04
Net Realized & Unrealized Gain on Securities 1.26
Total From Investment Operations 1.30
Distributions From Net Investment Income -
Total Distributions -
Net Asset Value at End of Period $11.30
Total Return+ 13.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) $4,733
Ratio of Expenses to Average Net Assets++ 1.49%**
Ratio of Net Investment Income to Average Net Assets 1.89%**
Portfolio Turnover Rate 65.52%
*For the period December 31, 1996 (effective date) to July 31, 1997.
**Annualized
+Total return measures the change in value of an investment over the period. It
is not annualized. It does not include the maximum front-end sales charge or
Contingent Deferred Sales Charge, and assumes reinvestment of dividends and
capital gains at Net Asset Value.
++During the period, Advisers agreed in advance to waive the asset allocation
fees and made payments of other expenses incurred by the Funds. Had such action
not been taken, the ratio of expenses to average net assets during the period
would have been as follows:
RATIO OF EXPENSES
TO AVERAGE NET ASSETS**
CONSERVATIVE TARGET FUND:
Class I Shares 3.64%
Class II Shares 4.53%
MODERATE TARGET FUND:
Class I Shares 1.26%
Class II Shares 2.09%
GROWTH TARGET FUND:
Class I Shares 2.19%
Class II Shares 2.95%
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
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
objective is a fundamental policy of each Fund and may not be changed without
shareholder approval. Of course, there is no assurance that each Fund's
objective will be achieved.
The Trust consists of three separate funds. The Funds all pursue the same
investment objective, but with different levels of risk and return. Each Fund is
designed to be a long-term investment. The descriptions below compare the three
Funds' levels of risk and return relative to one another and are not intended to
imply any particular absolute level of risk or return for any Fund.
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.
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.
GROWTH TARGET FUND is designed for investors seeking the highest level of
long-term total return that is consistent with a higher level of risk. This Fund
may therefore be most appropriate for investors having a longer time horizon
associated with their investments.
Investors may gain the following benefits through participation in the Trust:
Convenient, efficient access to a broadly diversified portfolio of Franklin
Templeton Funds, in a single investment.
Disciplined asset allocation, implemented and continually reviewed by
professional portfolio managers.
A choice of three Funds offering a continuum of risk/return levels, enabling
the investor to select that Fund (or combination of Funds) which most closely
matches the investor's risk/return preferences.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Funds will invest primarily in open-end investment companies (mutual funds)
that are members of the Franklin Templeton Group of Funds (individually, or
together, the "Underlying Fund(s)"). 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 or other affiliates of Resources serve as the investment manager to the
Underlying Funds. 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
Growth Series
Utilities Series
Franklin Small Cap Growth Fund
Franklin Value Fund
Franklin Real Estate Securities Fund
Mutual Shares Fund
Mutual Discovery Fund
U.S. FIXED-INCOME FUNDS
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin U.S. Government Securities Series
Franklin Investment Grade Income Fund
Franklin's AGE High Income Fund
INTERNATIONAL EQUITY FUNDS
Templeton Foreign Fund Templeton Developing Markets Trust Templeton Global
Smaller Companies Fund Templeton Foreign Smaller Companies Fund Templeton
Greater European Fund Templeton Pacific Growth Fund Templeton Latin America
Fund Franklin Templeton Japan Fund
INTERNATIONAL FIXED-INCOME FUNDS
Franklin Templeton Hard Currency Fund
Templeton Global Bond Fund
Franklin Global Government Income Fund
Franklin Templeton German Government Bond Fund
NATURAL RESOURCES FUNDS
Franklin Gold Fund
Franklin Natural Resources Fund
Under normal circumstances, it can generally be anticipated that of the three
Funds, the Growth Target Fund will hold a higher percentage of its assets in
Underlying Funds investing primarily in equity, international, and natural
resources securities than will the Moderate Target Fund, which in turn will hold
a higher percentage of its assets in such Underlying Funds than will the
Conservative Target Fund. Likewise, it can generally be anticipated that of the
three Funds, the Conservative Target Fund will hold a higher percentage of its
assets in Underlying Funds investing primarily in fixed-income securities than
will the Moderate Target Fund, which in turn will hold a higher percentage of
its assets in such Underlying Funds than will the Growth Target Fund.
The percentage ranges targeted for each Fund by broad asset class are set forth
below. For purposes of these percentage ranges, Franklin Gold Fund, Franklin
Natural Resources Fund, Franklin Real Estate Securities Fund and Utilities
Series are considered "sector equity funds." The percentage ranges applicable to
each asset class for each Fund may be changed from time to time by Advisers
without the approval of shareholders.
U.S. AND INTERNATIONAL
FIXED INCOME FUNDS
U.S. AND (INCLUDING DIRECT
INTERNATIONAL INVESTMENTS IN CASH SECTOR
FUND EQUITY FUNDS AND CASH EQUIVALENTS) EQUITY FUNDS
Conservative Target 20% to 50% 30% to 80% 0% to 20%
Moderate Target 30% to 70% 20% to 70% 0% to 30%
Growth Target 40% to 90% 10% to 60% 0% to 40%
Consistent with the table above, no more than 25% of a Fund's assets will be
invested in any one Underlying Fund, except a Fund may invest up to 50% of its
total assets in Franklin Short-Intermediate U.S. Government Securities Fund and
Franklin U.S. Government Securities Series.
PURCHASES OF SHARES OF THE UNDERLYING FUNDS. The Funds will invest only in Class
Z shares of Mutual Shares Fund and Mutual Discovery Fund and Advisor Class
shares of the other Underlying Funds. Accordingly, the Funds will not pay any
sales load or 12b-1 service or distribution fees in connection with their
investments in shares of the Underlying Funds. The Funds, however, will
indirectly bear their pro rata share of the fees and expenses incurred by the
Underlying Funds that are applicable to holders of Class Z and Advisor Class
shares. The investment returns of each Fund, therefore, will be net of the
expenses of the Underlying Funds in which it is invested.
DIRECT INVESTMENT IN SECURITIES AND OTHER INVESTMENT STRATEGIES. Each Fund may
invest a certain portion of its assets directly in the types of securities in
which the Underlying Funds invest. No Fund intends to invest more than 5% of its
assets directly in such securities, except for securities either issued or
backed by the full faith and credit of the U.S. government and repurchase
agreements. Securities issued by the U.S. government include, but are not
limited to, U.S. Treasury bills, notes, and bonds, and securities backed by the
full faith and credit of the U.S. government include those issued by the
Government National Mortgage Association. For a description of these securities,
please see "U.S. Government Securities Series of Franklin Custodian Funds, Inc."
under "How Do the Underlying Funds Invest their Assets?" and "What are some of
the Other Investment Policies and Strategies of, and Risks of an Investment in,
the Underlying Funds?" in the Appendix to this prospectus.
In addition, each Fund may engage directly in the types of investment strategies
in which each Underlying Fund may engage. Each Fund may use such investment
strategies to hedge investment positions, including investments directly in
securities and investments in the Underlying Funds, to protect the Fund against
a decline in an Underlying Fund's value. No Fund intends to commit more than 5%
of its assets to these investment strategies. For a discussion of these
investment strategies, see "What are the Fund's Potential Risks?"; "Other
Investment Policies of the Underlying Funds"; "What are the Underlying Funds'
Potential Risks?" and, in the Appendix, "What are some of the Other Investment
Policies and Strategies of, and Risks of an Investment in, the Underlying
Funds?".
Each Fund is also authorized to invest up to 100% of its assets temporarily in
the same types of securities in which the Underlying Funds may invest
temporarily and under the same circumstances as the Underlying Funds. See
"Temporary Investments" in the Appendix.
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's policy is not to invest more than 15% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them.
PORTFOLIO TURNOVER. Each Fund anticipates its annual portfolio turnover rate
generally will not exceed 100%, but this expected rate is not 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.
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 only be changed with shareholder approval. For a list of these
restrictions and more information about the Funds' investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. A Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decreases. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole. The value of an
investment in the Growth Target Fund will tend to fluctuate more than an
investment in the Moderate Target Fund, which in turn will fluctuate more than
an investment in Conservative Target Fund.
INVESTING IN THE UNDERLYING FUNDS. More than 25% of the value of a Fund's assets
is invested in a combination of the Underlying Funds. As a result, each Fund's
investment performance is directly related to the investment performance of the
Underlying Funds held by it. The ability of each Fund to meet its investment
objective is directly related to the ability of the Underlying Funds to meet
their objectives as well as the allocation among those Underlying Funds by
Advisers. There can be no assurance that the investment objective of any Fund or
Underlying Fund will be achieved.
INVESTMENT STRATEGIES OF THE UNDERLYING FUNDS. The Underlying Funds may engage
in a variety of investment strategies which involve certain risks. As a result,
the Funds may be subject to some of the risks resulting from these strategies.
Certain of the Underlying Funds may invest all or a portion of their assets in
foreign securities; invest all or a portion of their assets in high yielding,
high risk debt securities (commonly referred to as "junk bonds"); enter into
foreign currency transactions; engage in options transactions; engage in futures
contracts and options on future contracts; purchase zero coupon bonds and
pay-in-kind bonds; purchase restricted and illiquid securities; enter into
forward roll transactions; purchase securities on a when-issued or delayed
delivery basis; enter into repurchase agreements; borrow money; loan portfolio
securities and engage in various other investment strategies. To the extent the
Funds directly purchase these types of securities or engage in these investment
strategies, they will be subject to the same risks as the Underlying Funds.
Further information on these investment strategies can be found under "How Do
the Underlying Funds Invest their Assets?", "What are the Underlying Funds'
Potential Risks?", and in the Appendix, and in the SAI.
NON-DIVERSIFIED FUNDS. Each Fund is considered a non-diversified investment
company under the federal securities regulations which govern mutual funds
because it invests in the securities of a limited number of mutual funds. As a
result, each Fund may be subject to greater risk with respect to its individual
portfolio than a fund that is more broadly diversified among a number of
issuers. However, the Underlying Funds themselves are diversified investment
companies with the exception of Franklin Value Fund, Franklin Natural Resources
Fund, Franklin Real Estate Securities Fund, Franklin Templeton Hard Currency
Fund, Templeton Global Bond Fund, Franklin Templeton German Government Bond Fund
and Franklin Global Government Income Fund.
CONCENTRATION. Seven of the Underlying Funds, Utilities Series, Franklin Value
Fund, Franklin Natural Resources Fund, Franklin Real Estate Securities Fund,
Franklin Gold Fund, Franklin Templeton Hard Currency Fund and Templeton Global
Bond Fund, may concentrate their investments in a particular industry or sector;
Franklin Templeton German Government Bond Fund will concentrate its assets in
debt obligations issued or guaranteed by the Federal Republic of Germany, its
agencies, instrumentalities or political subdivisions; and Franklin Global
Government Income Fund may invest more than 25% of its assets in the securities
of foreign governments. See "How Do the Underlying Funds Invest their Assets?"
Each Fund does not intend to invest more than 25% of its assets in any one of
these Underlying Funds. In addition, the Funds do not intend to concentrate in
any particular industry, sector or foreign government security.
HOW DO THE UNDERLYING FUNDS INVEST THEIR ASSETS?
The following is a summary of the investment objectives and strategies of the
Underlying Funds and the types of securities in which they may invest. The
investment objectives of the Underlying Funds are fundamental policies and there
is no assurance that they will achieve their respective investment objectives.
Additional investment strategies with respect to the Underlying Funds are
described in "What are the Underlying Funds' Potential Risks?," the Appendix,
the SAI, and the prospectus of each Underlying Fund. For a free copy of a
prospectus of any of the Underlying Funds, call 1-800/DIAL BEN.
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.
Equity will normally invest at least 65% of its assets in common and preferred
stocks and securities convertible into common stocks. Equity generally invests
in securities of companies which, in its 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 preferred and
debt securities, including bonds, debentures, notes, and commercial paper of
corporate issuers. Equity's investment in preferred, convertible, and debt
securities may be rated investment grade (i.e., rated in one of the top four
categories by S&P or Moody's) or below investment grade. Securities are given
"ratings" by independent organizations which grade the issuer based upon its
financial soundness. Equity will not invest more than 5% of its net assets in
securities rated below investment grade. 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.
Equity will ordinarily purchase foreign securities which are traded in the U.S.,
although it may buy foreign securities directly in foreign markets. Equity may
also purchase sponsored or unsponsored American Depositary Receipts ("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 ADRs are certificates issued by U.S. banks representing the right to
receive the securities of a foreign issuer deposited with the bank or a
correspondent bank. 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 25% of its net assets in foreign securities not publicly traded in the
U.S.
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's 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 U.S.
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. Most of the fund's investments,
however, are rated at least Baa by Moody's or BBB by S&P. With respect to
unrated securities, it is also the fund's intent to purchase securities which,
in the view of its investment manager, would be comparable in quality to the
fund's rated securities. Utilities will neither purchase issues that are in
default nor invest in securities which are felt by the investment 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 its 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 its 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,
including investments in small capitalization companies, that its 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, alone and in combination, may identify
companies that are attractive to financial or strategic acquirers (i.e.,
takeover candidates). Purchases may include companies in cyclical businesses,
turnarounds, and companies emerging from bankruptcy. Purchase decisions may also
be influenced by company and its insiders' stock buy-backs. Value may invest in
companies that have relatively small revenues, limited product lines, and a
small share of the market for their products or services.
Value may invest in convertible securities, which are, in general, debt
obligations or preferred stocks that may be converted within a specified period
of time into a certain amount of common stock of the same or a different issuer.
Value may also invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), and in
synthetic convertible securities.
With respect to foreign securities, Value may buy sponsored or unsponsored ADRs,
GDRs and EDRs. 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 25% 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
its investment manager believes possess intrinsic values in excess of the
current market prices of such securities. Lower rated securities in which Value
may invest include securities rated D, the lowest rating category of S&P, or
unrated securities of comparable quality. Debt obligations rated D are in
default and the payment of interest and/or repayment of principal is in arrears.
The fund may invest in zero coupon or deferred interest securities and
pay-in-kind bonds. The fund may also acquire loan participations. For a
description of the risks associated with investing in high-yielding fixed income
securities, including defaulted securities, see "What are the Underlying Funds'
Potential Risks?"
Some of the securities Value purchases are considered "restricted securities."
Restricted securities are securities with legal or contractual restrictions on
resale, including securities that are not registered under the 1933 Act.
Securities not registered under the 1933 Act may not be sold without first being
registered, unless there is an available exemption under the Act.
FRANKLIN REAL ESTATE SECURITIES FUND OF FRANKLIN REAL ESTATE SECURITIES TRUST
("REAL ESTATE"). The investment objective of Real Estate is to maximize total
return. In connection with this objective, Real Estate will invest primarily in
the equity 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.
"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 its investment manager.
In addition, the fund does not intend to invest more than 10% of its net assets
in high risk, high yield convertible and debt securities. For a description of
the risks associated with investing in high-yielding fixed income securities,
see "What are the Underlying Funds' Potential Risks?"
Real Estate may invest in foreign securities not publicly traded in the U.S. 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 FRANKLIN 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 preset 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 from any size issuer, it will
tend to invest in securities of issuers with market capitalizations in excess of
$1 billion. The fund may invest in securities that are traded on U.S. or foreign
exchanges, NASDAQ national market system, 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, currently 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 as to 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 no 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 Resolution Trust Corporation, 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 of debtor companies in reorganization or
financial restructuring, purchased by the fund may have very long maturities.
The length of time remaining until maturity is one factor its 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 its 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 and may sell short securities it does not own up to 5%
of its assets. Further, the fund may purchase securities denominated in any
currency and generally expects currency risks will be hedged to the extent that
hedging is available.
Mutual Shares may invest in securities of non-U.S. issuers and in sponsored or
unsponsored depositary receipts or other securities representing interests in
securities of foreign issuers.
MUTUAL DISCOVERY FUND OF FRANKLIN MUTUAL SERIES FUND INC. ("DISCOVERY"). The
principal objective of Discovery is long-term capital appreciation. Discovery
investment policies and strategies are virtually identical to those of Mutual
Shares, except that Discovery 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
expects that up to approximately 50% of its assets may be invested in foreign
securities. See "Mutual Shares Fund of Franklin Mutual Series Fund Inc." above
for the other investment strategies of this fund.
FIXED INCOME FUNDS
As described below, the following Underlying Funds are funds that invest
primarily in fixed income securities.
U.S. FIXED INCOME FUNDS
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND OF FRANKLIN
INVESTORS SECURITIES TRUST ("SHORT-INTERMEDIATE"). The investment objective of
Short-Intermediate is to provide investors with as high a level of current
income as is consistent with prudent investment practices and preservation of
shareholders' capital. The fund intends to invest up to 100% of its net assets
in U.S. government securities. As a fundamental policy, Short-Intermediate must
invest at least 65% of its net assets in U.S. government securities. It is the
investment policy of the fund (which may be changed upon notice to shareholders)
to maintain the average dollar weighted maturity of its portfolio in a range of
two to five years. Within this range, the fund intends to emphasize an average
weighted maturity of 31/2 years or less.
Short-Intermediate may invest in obligations either issued or guaranteed by the
U.S. government and its agencies or instrumentalities including, but not limited
to: direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds; and obligations of U.S. government agencies or instrumentalities such
as Federal Home Loan Banks, Federal National Mortgage Association ("FNMA"),
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 U.S., 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 and in
inflation-indexed securities issued by the U.S. Treasury.
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 U.S. GOVERNMENT. THE ASSOCIATION MAY
BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS UNDER ITS
GUARANTEE. OF COURSE, THIS GUARANTEE DOES NOT EXTEND TO THE MARKET VALUE OR
YIELD OF THE GNMAS OR THE NET ASSET VALUE OR PERFORMANCE OF THE FUND, WHICH WILL
FLUCTUATE DAILY WITH MARKET CONDITIONS.
Payments to holders of GNMAs, such as the fund, consist of the monthly
distributions of interest and principal less the Association's and issuers'
fees. The portion of the monthly payment which represents a return of principal
will be reinvested by Government Securities in securities which may bear
interest at a rate higher or lower than the obligations from which the principal
payment was received. When mortgages in the pool underlying a GNMA are prepaid
by borrowers or as a result of foreclosure, such principal payments are passed
through to the GNMA holders, such as the fund. Accordingly, a GNMA's life is
likely to be substantially shorter than the stated maturity of the mortgages in
the underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
FRANKLIN INVESTMENT GRADE INCOME FUND OF FRANKLIN MANAGED TRUST ("INVESTMENT
GRADE"). The objective of Investment Grade is to seek a maximum level of income
consistent with prudent exposure to risk. The fund seeks to achieve its
objective by investing in a diversified portfolio of debt securities, most of
which will be intermediate-term investment grade issues and dividend-paying
common and preferred stocks. At times, particularly during periods when the
yield curve is positive, the fund will endeavor to provide a higher yield than
that available from a money market mutual fund, while attempting to avoid the
potential risks to principal often associated with both non-investment grade
securities and longer-term instruments.
Investment Grade may invest in corporate debt obligations such as bonds, notes,
and debentures; obligations convertible into common stocks; obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities;
obligations denominated in either U.S. dollars or foreign currencies issued by
foreign corporations and governments (including Canadian provinces and their
instrumentalities), and supranational entities; commercial paper; and currency
deposits or equivalents.
Under normal market conditions, at least 75% of the fund's portfolio will be
invested in debt securities that are rated in one of the four highest rating
categories or in unrated securities that are of comparable quality as determined
by its 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, Investment Grade 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.
AGE HIGH INCOME FUND OF FRANKLIN HIGH INCOME TRUST ("AGE"). AGE's principal
investment objective is to earn a high level of current income. As a secondary
objective, the fund seeks capital appreciation to the extent it is possible and
consistent with the fund's principal objective. AGE will generally invest its
assets in high yield, high risk, lower rated, fixed-income debt securities and
dividend-paying common or preferred stocks. 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 buying 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 its
investment manager 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.
Rather than relying principally on the ratings assigned by rating services, the
investment analysis of securities under consideration for AGE's portfolio may
also include, among other things, consideration of relative values, based on
such factors as anticipated cash flow, interest or dividend coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements, and the issuer's changing
financial condition and public recognition of the change. It is the fund's
intent, however, not to purchase securities rated below CCC by S&P or Caa by
Moody's. With respect to unrated securities, it is the fund's intent not to
purchase securities which, in the view of its investment manager, would be
comparable to securities rated below B by Moody's or S&P. If a rating agency
changes the rating on an issue held in AGE's portfolio or the security goes into
default, AGE will consider that event in its evaluation of the overall
investment merits of that security but will not automatically sell the security.
For a description of these ratings, see the Appendix.
AGE may purchase defaulted debt securities if, in the opinion of its 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 U.S. 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 U.S.
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 U.S. 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, for temporary defensive purposes, invest without
limitation in U.S. government securities, bank time deposits in the currency of
any major nation and commercial paper, and 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 CCC by S&P and between Baa and Caa by Moody's or, if unrated,
are of equivalent investment quality as determined by its investment manager. As
an initial policy, which may be changed by the fund's 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 its 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 U.S., 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, CDs, 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 fund's 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. 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
U.S.).
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
fund's 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 its investment manager. The
fund may, from time to time, purchase defaulted debt securities if, in the
opinion of the investment manager, the issuer may resume interest payments in
the near future. The fund will not invest more than 10% of its total assets in
defaulted debt securities, which may be illiquid. For a description of the risks
associated with investing in high yielding, fixed income securities, including
defaulted securities, see "What are the Underlying Funds' Potential Risks?"
TEMPLETON FOREIGN SMALLER COMPANIES FUND OF FRANKLIN TEMPLETON INTERNATIONAL
TRUST ("FOREIGN SMALLER"). The principal investment objective of Foreign Smaller
is to seek to provide long-term growth of capital. Under normal market
conditions, Foreign Smaller invests at least 65% of its total assets in a
diverse international portfolio of equity securities that trade on markets in
countries other than the U.S. and which are issued by companies (i) domiciled in
countries other than the U.S., or (ii) that derive at least 50% of their
revenues or pre-tax income from activities outside of the U.S. Thus it is
possible, although not anticipated, that up to 35% of the fund's assets could be
invested in U.S. companies.
In selecting portfolio securities, Foreign Smaller attempts to take advantage of
the difference between economic trends and the anticipated performance of
securities and securities markets in various countries. Foreign Smaller may
invest in the securities of issuers in, but not limited to, the following
countries: Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada,
Chile, Colombia, Denmark, Finland, France, Germany, Greece, Hong Kong, India,
Indonesia, Italy, Japan, South Korea, Luxembourg, Malaysia, Mexico, the
Netherlands, New Zealand, Norway, Peru, the Philippines, Portugal, Russia,
Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, and the United
Kingdom. It is currently expected that under normal conditions, at least 65% of
the fund's total assets will be invested in securities of foreign issuers in at
least three of the countries listed herein.
Under normal market conditions, Foreign Smaller's assets are substantially
invested in equity securities consisting of common and preferred stock, bonds or
preferred stock convertible into common stock, warrants and securities
representing certain underlying international securities such as ADRs and EDRs.
The fund invests predominantly in smaller capitalization foreign equity
securities, i.e., securities with a market capitalization of $1 billion or less
at the time of purchase of issuers located in, or deriving a significant portion
of their revenues from, or for which the principal securities trading market is
in any foreign country, including developing market countries ("foreign smaller
capitalization equity securities"). Under normal market conditions, Foreign
Smaller will have at least 65% of its portfolio in foreign smaller
capitalization equity securities.
Smaller capitalization issuers include relatively new or unseasoned companies
which are in their early stages of development, or small companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. There are greater risks associated with a fund that invests
a substantial portion of its net assets in smaller capitalization equity
securities. For a description of these risks, see "New or Unseasoned Companies"
and "Small Capitalization Stocks" in the Appendix.
Up to 35% of Foreign Smaller's assets may be invested in bonds, fixed-income
debt securities and synthetic securities rated Baa or better by Moody's or BBB
or better by S&P, or that are not rated but determined by its investment manager
to be of comparable quality. The fund may invest up to 5% of its portfolio in
non-investment grade bonds issued by both U.S. and foreign issuers, which entail
default and other risks greater than those associated with higher rated
securities. In the event the rating on an issue held in the fund's portfolio is
lowered by a rating service, the change will be considered by the fund in its
evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security. For a description of
these ratings, see the Appendix.
The fund may seek capital appreciation by investing in these debt securities.
Appreciation in the value of these investments may result from changes in
relative foreign currency exchange rates, interest rates or improvement in the
creditworthiness of an issuer. The receipt of income from these debt securities
is incidental to the fund's investment objective of growth of capital. These
debt obligations consist of U.S. and foreign government securities and corporate
debt securities, including Samurai and Yankee bonds, Eurobonds and depositary
receipts.
The fund may invest up to 10% of its net assets in warrants, including warrants
that are not listed on an exchange. The fund may also invest up to 35% of its
assets in synthetic convertible securities. Synthetic convertible securities are
not considered equity securities for purposes of the fund's 65% investment
policy. For a description of synthetic convertible securities, please see
"Convertible Securities, including Enhanced and Synthetic Convertible
Securities" in the Appendix.
Although Foreign Smaller will not invest more than 25% of its assets in any one
industry or the securities issued by any foreign government, the fund may invest
more than 25% of its assets in the securities of issuers in one or more
countries. Consistent with this policy, the fund may invest up to 30% of its
assets in securities issued by Hong Kong companies.
Some of the countries in which the fund invests may not permit direct
investment. Investments in these countries may only be permitted through
government approved investment vehicles. Investing through such vehicles may
involve duplicative or layered fees or expenses and may, as well, be subject to
limitations under the 1940 Act.
The fund may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and/or invest a portion of its assets in high quality
money-market instruments. Any decision to substantially withdraw from the equity
market is reviewed by the fund's Board of Trustees. Money market instruments in
which the fund may invest include, but are not limited to, the following
instruments of U.S. or foreign issuers: government securities; commercial paper;
bank CDs; bankers' acceptances; and repurchase agreements secured by any of the
foregoing. All such securities will be rated A-1 or A-2 by S&P or P-1 or P-2 by
Moody's or, if unrated, determined by the investment manager to be of comparable
quality.
TEMPLETON GREATER EUROPEAN FUND OF TEMPLETON GLOBAL INVESTMENT TRUST ("GREATER
EUROPEAN"). The 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 non-fundamental policy, Greater
European will limit investments in Russian securities 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. As an
operating policy, which may be changed by the fund's 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. Greater European may invest up to 25% of its
total assets in "Brady Bonds." 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 and will limit its investment in all restricted securities,
including Rule 144A securities, to 15% of its total assets.
TEMPLETON PACIFIC GROWTH FUND OF FRANKLIN TEMPLETON INTERNATIONAL TRUST
("PACIFIC GROWTH"). The principal investment objective of Pacific Growth is to
provide long-term growth of capital. Under normal market conditions, the fund
invests at least 65% of its total assets in equity securities that trade on
markets in the Pacific Rim and are issued by companies (i) domiciled in the
Pacific Rim or (ii) that derive at least 50% of their revenues or pre-tax income
from activities in the Pacific Rim.
For purposes of this policy, the countries in the Pacific Rim are Australia,
China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, South Korea, and Thailand. It is currently expected that
under normal conditions, at least 65% of the fund's total assets will be
invested in securities of foreign issuers in at least three of those countries.
Although Pacific Growth will not invest more than 25% of its assets in any one
industry or the securities issued by any foreign government, the fund may invest
more than 25% of its assets in the securities of issuers in one or more
countries. Consistent with this policy, Pacific Growth may invest up to 30% of
its assets in securities issued by Hong Kong companies.
Pacific Growth may invest up to 35% of its assets in the securities of issuers
domiciled outside of the Pacific Rim. These investments may include securities
of issuers (i) in countries that are not located in the Pacific Rim but are
linked by tradition, economic markets, cultural similarities, or geography to
countries in the Pacific Rim; and (ii) located elsewhere in the world which have
operations in the Pacific Rim or which stand to benefit from political and
economic events in the Pacific Rim.
Under normal conditions, the fund's assets are substantially invested in equity
securities consisting of common and preferred stock, bonds or preferred stock
convertible into common stock, warrants, and securities representing certain
underlying international securities such as ADRs. Pacific Growth may, from time
to time, hold significant cash positions until suitable investment opportunities
are available, consistent with its policy on short-term investments.
Up to 35% of Pacific Growth's total assets may be invested in investment grade
bonds, fixed-income debt securities, and synthetic securities rated Baa or
better by Moody's or BBB or better by S&P or that are unrated but determined to
be of comparable quality. The fund may seek capital appreciation by investing in
these debt securities. Debt obligations in which the fund may invest include
U.S. and foreign government securities and corporate debt securities, including
Samurai and Yankee bonds, Eurobonds, and depositary receipts. The issuers of
these debt securities may or may not be domiciled in the Pacific Rim.
Pacific Growth may invest up to 10% of its net assets in warrants, including
warrants that are not listed on an exchange. The fund may invest up to 35% of
its assets in synthetic convertible securities. Synthetic convertible securities
are not considered equity securities for purposes of the fund's 65% investment
policy.
Pacific Growth may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and/or invest a portion of its assets in high-quality money
market instruments to the same extent and subject to the same rating
requirements as Foreign Smaller.
TEMPLETON LATIN AMERICA FUND OF TEMPLETON GLOBAL INVESTMENT TRUST ("LATIN
America"). The investment objective of Latin America is long-term capital
appreciation. The fund seeks to achieve its objective by investing primarily in
equity and debt securities of issuers in the following Latin American countries:
Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Ecuador,
El Salvador, French Guyana, Guatemala, Guyana, Honduras, Mexico, Nicaragua,
Panama, Paraguay, Peru, Surinam, Trinidad/Tobago, Uruguay, and Venezuela. Latin
America may invest without limit in emerging market or developing countries.
Under normal market conditions, Latin America will invest at least 65% of its
total assets in equity and debt securities of issuers in the countries named
above. The balance of the fund's assets will be invested in (i) equity
securities and debt obligations of companies and government entities of
countries other than those named above, and (ii) short-term and medium-term debt
securities.
Latin America may invest in the same types of equity securities, and for capital
appreciation may invest without limit in the same types of debt securities, as
Greater European. Latin America will not invest more than 5% of its total assets
in debt securities rated lower than Baa by Moody's or BBB by S&P. The investment
manager will actively manage Latin America's assets in response to market,
political and general economic conditions, and will seek to adjust Latin
America's investments based on its perception of which investments would best
enable the fund to achieve its investment objective.
The fund may not invest more than 5% of its assets in warrants (exclusive of
warrants acquired in units or attached to securities) or more than 15% of its
assets in securities with a limited trading market. Latin America will limit its
investment in restricted securities, other than Rule 144A securities, to 10% of
its total assets and will limit its investments in all restricted securities,
including Rule 144A securities, to 15% 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.
Many of the Brady Bonds have been issued relatively 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 rate 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, which it seeks to achieve 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.
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. Up to 20% of Japan's total assets may be invested in securities
of non-Japanese issuers, including issuers in underdeveloped countries.
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.
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 and supranational organizations (such as the World Bank,
the European Investment Bank and the Asian Development Bank). 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. As an operating policy which may be changed
by the fund's Board of Trustees, 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 U.S. 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 fund's 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 its 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.
Subject to specific restrictions described more fully below, the fund may invest
in money market instruments and forward contracts 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 fund's 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 its 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 CDs, 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 may invest up to 25% of its assets
in obligations of 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. These
investments may include bank obligations, such as CDs, time deposits, and
bankers' acceptances.
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 may invest in "when-issued"
securities and collateralized mortgage obligations. Under normal circumstances,
the fund will invest 65% of its total assets in issuers domiciled in at least
three different nations (one of which may be the U.S.). 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 Ba 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?" Investments in commercial paper are limited to
obligations rated Prime-1 by Moody's or A-1 by S&P, or if unrated, issued by
companies having an outstanding debt issue currently rated Aaa or Aa by Moody's
or AAA or AA by S&P. The average maturity of the debt securities in the fund's
portfolio will fluctuate depending upon its 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 fund's Board of Trustees, the investment manager will select securities
for purchase by the fund from many industries that it believes to be productive
and beneficial.
The fund may invest up to 5% of its total assets in securities that may not be
resold without registration under applicable law ("restricted securities"). The
fund may invest up to 10% of its total assets in restricted securities and other
securities which are not restricted but which are not readily marketable (i.e.,
trading in the security is suspended or, in the case of unlisted securities,
market makers do not exist or will not entertain bids or offers).
FRANKLIN GLOBAL GOVERNMENT INCOME FUND OF FRANKLIN INVESTORS SECURITIES TRUST
("GLOBAL GOVERNMENT"). The fund's principal investment objective is to provide
high current income, consistent with preservation of capital, with capital
appreciation as a secondary consideration.
Global Government seeks to achieve its objective by investing primarily in
securities issued by domestic and foreign governments and their political
subdivisions. Investments will be selected to provide a high current yield and
currency stability, or a combination of yield, capital appreciation or currency
appreciation consistent with the fund's objective.
As a global fund, Global Government may invest in securities issued in any
currency and may hold foreign currency. Under normal circumstances, at least 65%
of the fund's assets will be invested in government securities of issuers
located in at least three countries, one of which may be the U.S. Securities of
issuers within a given country may be denominated in the currency of another
country, or in multinational currency units such as the European Currency Unit
("ECU").
Global Government is authorized to invest in securities issued by domestic and
foreign governments and their political subdivisions, including the U.S.
government, its agencies, and authorities or instrumentalities ("U.S. government
securities") and supranational organizations (as described below) and in
securities issued by foreign and domestic corporations, banks, and other
business organizations. There are no restrictions or limitations on investments
in obligations of the U.S., or of corporations chartered by the U.S. Congress as
federal government instrumentalities.
Under normal economic conditions, at least 65% of Global Government's total
assets will be invested in fixed-income securities such as bonds, notes and
debentures. Some of the fixed-income securities may be convertible into common
stock or be traded together with warrants for the purchase of common stocks,
although the fund has no current intention of converting such securities into
equity or holding them as equity upon such conversion. The remaining 35% may be
invested, to the extent available and permissible, in equity securities, foreign
or domestic currency deposits or equivalents such as short-term U.S. Treasury
notes or repurchase agreements.
Global Government may invest in debt securities with varying maturities. Under
current market conditions, it is expected that the dollar-weighted average
maturity of the fund's investments will not exceed 15 years. Generally, the
portfolio's average maturity will be shorter when, in the opinion of its
investment manager, interest rates worldwide or in a particular country are
expected to rise, and longer when interest rates are expected to fall.
Other fixed-income securities of both domestic and foreign issuers in which the
fund may invest include preferred and preference stock and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment trust certificates and
conditional sales contracts. For a discussion of these latter three categories
of investments, see "Equipment Related Instruments" in the Appendix. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit). Global Government will limit
its investments in warrants, valued at the lower of cost or market, to 5% of the
fund's net assets or to warrants attached to securities.
Global Government is also authorized to invest in debt securities of
supranational entities denominated in any currency. A supranational entity is an
entity designated or supported by the national government of one or more
countries to promote economic reconstruction or development. Examples of
supranational entities include, among others, the World Bank, the European
Investment Bank and the Asian Development Bank. The fund may, in addition,
invest in debt securities denominated in ECU of an issuer in any country
(including supranational issuers). Global Government is further authorized to
invest in "semi-governmental securities," which are debt securities issued by
entities owned by either a national, state or equivalent government or are
obligations of a government jurisdiction that are not backed by its full faith
and credit and general taxing powers.
Global Government may invest in obligations of domestic and foreign banks which,
at the date of investment, have total assets (as of the date of their most
recently published financial statements) in excess of one billion dollars (or
foreign currency equivalent at then current exchange rates).
Global Government is also authorized to acquire loan participations.
Global Government will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its objective based upon relative interest rates among currencies, the
outlook for changes in these interest rates, and anticipated changes in
worldwide exchange rates. In considering these factors, a country's economic and
political conditions such as inflation rate, growth prospects, global trade
patterns and government policies will be evaluated.
Global Government's assets will be invested principally within Australia,
Canada, Japan, New Zealand, the U.S. and Western Europe, and in securities
denominated in the currencies of these countries or denominated in multinational
currency units such as the ECU. The fund may also acquire securities, including
fixed-income obligations of governments, government agencies and corporations,
and currency in less developed countries and in developing countries. The
investment manager does not currently expect the fund's investments in less
developed and developing countries to exceed 20% of the fund's net assets.
Global Government may invest in higher yielding, higher risk, lower rated debt
obligations that are rated at least B by Moody's or S&P or, if unrated, are at
least of comparable quality as determined by the investment manager; such
investments will be less than 35% of the fund's net assets. For a description of
these ratings, see the Appendix. For a description of the risks associated with
investing in high yielding, fixed income securities, see "What are the
Underlying Funds' Potential Risks?" Many debt obligations of foreign issuers,
especially developing market issuers, are not rated by U.S. rating agencies and
their selection depends on the investment manager's internal analysis.
Under normal market conditions, Global Government will have at least 65% of its
total assets invested in securities issued or guaranteed by domestic and foreign
governments. Securities issued by central banks that are guaranteed by their
national governments are considered to be government securities. Bonds of
foreign governments or their agencies which may be purchased by the fund may be
less secure than those of U.S. government issuers.
During periods when the investment manager believes that the fund should be in a
temporary defensive position, the fund may have less than 25% of its assets
concentrated in foreign government securities and may invest instead in U.S.
government securities. U.S. government securities which may be purchased by the
fund may include (i) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance: U.S. Treasury bills, U.S.
Treasury notes, and U.S. Treasury bonds, all of which are backed by the full
faith and credit of the U.S. government; and (ii) obligations issued or
guaranteed by U.S. government agencies or instrumentalities, some of which are
backed by the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage Association); some
of which are supported by the right of the issuer to borrow from the U.S.
government (e.g., obligations of Federal Home Loan Banks); and some of which are
backed only by the credit of the issuer itself (e.g., obligations of the Student
Loan Marketing Association).
Global Government may invest no more than 10% of the value of its net assets in
restricted securities (other than certain Rule 144A securities), or in other
securities which, in the opinion of the fund's investment manager, may be
otherwise illiquid.
FRANKLIN TEMPLETON GERMAN GOVERNMENT BOND FUND OF FRANKLIN TEMPLETON GLOBAL
TRUST ("GERMAN BOND"). The investment objective of German Bond is to seek, over
the long-term, total return through investment in a managed portfolio of German
government bonds.
Under normal market conditions, German Bond will invest 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"); and securities backed exclusively by loans to
public sector institutions, known as Offentliche Pfandbriefe or global
Pfandbriefe. The German government obligations or Pfandbriefe 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; 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.
For liquidity purposes, German Bond may invest up to 5% of its total assets in
U.S. dollar denominated cash and money market instruments, such as U.S. Treasury
bills.
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. 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.
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.
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 will normally invest in common stocks and securities convertible into
common stocks, such as convertible preferred stock, convertible debentures,
convertible rights and warrants, 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), and may 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 U.S. government
securities. Gold may invest in fixed-income and convertible securities rated
below investment grade by Moody's or S&P or that are unrated but considered by
its investment manager to be of comparable quality.
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 U.S. 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 U.S. and such
countries.
The fund will ordinarily buy securities that are traded in the U.S. or buy
sponsored or unsponsored ADRs, EDRs or GDRs. The fund may also buy 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 and gold coins.
Gold's assets will be invested in gold bullion at such times as the prospects of
such investments are, in the opinion of its investment manager, attractive in
relation to other possible investments. Transactions in gold bullion by the fund
are negotiated with principal bullion dealers unless, in its 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's total return consists of both capital appreciation
and current dividend and interest income. 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 that 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.
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 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 limit, in investment grade fixed-income
securities. Investment grade securities are securities rated in one of the four
highest rating categories of a national recognized rating service, such as
Moody's or S&P, and also include unrated securities that are comparable in
quality to securities that have been rated investment grade. The four highest
rating categories are Aaa, Aa, A and Ba for Moody's and AAA, AA, A and BBB for
S&P. 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 its 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 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. Investments of the fund may be denominated in
foreign currencies. The fund's investment manager will attempt to independently
accumulate and evaluate information with respect to the issuers of the
underlying securities of sponsored and unsponsored ADRs to attempt to limit the
fund's exposure to the market risk associated with such investments. For
purposes of Natural Resources' investment policies, investments in ADRs will be
deemed to be investments in the equity securities of the foreign issuers into
which they may be converted.
Under normal conditions, it is anticipated that the percentage of assets
invested in U.S. securities will be higher than that invested in securities of
any other single country. It is possible that at times the fund may have 50% or
more of its total assets invested in foreign securities.
Natural Resources is permitted to invest up to 35% of its assets in securities
of issuers that are outside the natural resources sector. Such investments will
consist of common stocks, debt securities or preferred stocks and REITs 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, Pacific Growth, Foreign
Smaller, Global Government, Global Bond, Latin America, Japan, Greater European,
and Developing Markets may purchase and sell put and call options on securities
and securities indices which trade on securities exchanges, which may include
foreign exchanges, and in the over-the-counter ("OTC") market. These funds,
along with Value and Natural Resources, also may purchase and sell financial
futures and options on financial futures with respect to securities and
securities indices. AGE may write covered call options without limitation, but
does not currently anticipate that it will do so.
Pacific Growth, Foreign Smaller, Global Government and Value may engage in
"spread" and "straddle" transactions. A spread transaction is one in which a
fund purchases and writes a put or call option on the same underlying security,
with the options having different exercise prices and/or expiration dates. In a
straddle transaction, the fund purchases or writes combinations of put and call
options on the same security.
Growth and Utilities may write (sell) covered call options which are listed for
trading on a national securities exchange. Writing a "covered" call option means
that the fund will only write (sell) options on securities which it actually
owns. When a fund sells covered call options, it will receive a cash premium
which can be used in whatever way is felt to be most beneficial to the fund.
Growth may also purchase put options on securities. Put options on particular
securities may be purchased to protect against a decline in the market value of
the underlying security below the exercise price less the premium paid for the
option. Growth may sell a put option which it has previously purchased prior to
the sale of the securities underlying such option.
Value may write covered call options on securities that are listed on a national
securities exchange or traded OTC and purchase listed and OTC call and put
options on securities and securities indices. Value may engage in forward
conversion transactions whereby the fund will write call options on securities
it has purchased and purchase put options on those securities. Pacific Growth,
Foreign Smaller, Developing Markets, Global Government, Global Bond, Equity,
Real Estate, Small Cap, Greater European, Latin America and Japan may write
covered call and put options on securities and securities indices that are
traded on exchanges or in the OTC market.
Investment Grade may write covered call and put options on any securities it may
purchase for its portfolio. The fund may purchase call and put options for the
purpose of offsetting its obligations pursuant to previously written options.
The fund may purchase put options only on U.S. government securities in its
portfolio in anticipation of a decline in the market value of such securities.
Global Government may write options in connection with buy-and-write
transactions; that is, it may purchase a security and then write a call option
against that security. The exercise price will depend upon the expected price
movement and may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current value of the security. Global Government may
enter into futures on debt securities that are backed by the U.S. government and
may enter into futures on corporate securities and non-U.S. government debt
securities when such securities become available.
German Government may use futures, option contracts on futures, and OTC options
on a temporary basis to maintain its ongoing exposure to the German mark and to
German government obligations. However, it does not currently intend to enter
into currency futures or options thereon. Only under extraordinary circumstances
will the fund employ forwards, futures and options for hedging purposes.
Mutual Shares' and Discovery's 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 may not purchase or sell put options on futures on
individual corporate debt and individual equity securities.
The options and futures transactions of many of the Underlying Funds, as
described above, have limited purposes. For example, as to options and futures,
Gold and Value, and as to futures only, Global Bond, Pacific Growth and Foreign
Smaller may only engage in such activities for hedging purposes or other
appropriate risk management purposes. Real Estate may only engage in options and
futures transactions, and Pacific Growth and Foreign Smaller may only engage in
options transactions for hedging purposes or to increase income to such funds.
Equity may only engage in options and futures transactions for hedging purposes
or to accommodate cash flows. Investment Grade may purchase and sell put and
call options on interest rate futures contracts solely for hedging purposes.
Mutual Shares and Discovery may only engage in futures and options for
non-hedging purposes if no more than 5% of their respective assets are at risk.
For hedging purposes only, Developing Markets and Japan may buy and sell
financial futures contracts, stock (and for Japan bond) index futures contracts,
foreign currency futures contracts and options on any of the foregoing.
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.
For a further description of these techniques, see the SAI.
INTEREST RATE FUTURES AND OPTIONS THEREON. Value, Pacific Growth, Foreign
Smaller, Mutual Shares, Discovery, Global Government and Natural Resources may
enter into interest rate futures contracts and options thereon. Investment Grade
may purchase options on interest rate futures. Interest rate futures contracts
are contracts for the future delivery of U.S. government securities and
index-based futures contracts. The value of these instruments changes in
response to changes in the value of the underlying security or index, which
depend primarily on prevailing interest rates.
CURRENCY FUTURES CONTRACTS AND OPTIONS THEREON. Equity, Small Cap, Pacific
Growth, Foreign Smaller, Natural Resources, Mutual Shares, Discovery, Developing
Markets, Greater European, Latin America, Japan, Global Bond, Global Government
and Hard Currency may enter into futures contracts on currencies. A futures
contract on currency is an agreement to buy or sell currency at a specified
price during a designated month.
These funds may also buy and sell put and call options on currency futures
contracts. A put option purchased by the fund would give it the right to assume
a position as the seller of a futures contract. A call option purchased by the
fund would give it the right to assume a position as the buyer of a futures
contract. The fund is required to pay a premium for a put or call option on a
futures contract, but is not required to take any actions under the contract. If
the option cannot be profitably exercised before it expires, the fund's loss
will be limited to the amount of the premium and any transaction costs.
OPTIONS ON FOREIGN CURRENCIES. AGE, Pacific Growth, Foreign Smaller, Natural
Resources, Mutual Shares, Discovery, Greater European, Latin America, Japan,
Developing Markets, Global Government and Global Bond may purchase and sell
(write) put and call options on foreign currencies traded on U.S. and foreign
exchanges, or OTC. The funds will engage in such option transactions for various
hedging purposes such as to protect against declines in the U.S. dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities or other assets to be acquired or to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Hard Currency may, for hedging purposes, buy put and call
options on any currency in which the fund's investments are denominated.
FORWARD CURRENCY EXCHANGE CONTRACTS. AGE, Mutual Shares, Discovery, Pacific
Growth, Foreign Smaller, Natural Resources, Hard Currency, Global Bond, Global
Government, Greater European, German Government, Latin America, Japan, Templeton
Foreign, Smaller Companies, Developing Markets, and Gold may all, to some
degree, engage in foreign currency exchange transactions. The funds will
normally conduct foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market
(Templeton Foreign and Smaller Companies may engage only in this type of forward
foreign currency exchange transaction), or through entering into forward
contracts to purchase or sell foreign securities. However, some price spread on
these transactions (to cover service charges) will be incurred when a fund
converts assets from one currency to another. When a fund is the buyer or seller
in such a transaction, it will either cover its position or maintain, in a
segregated account with its custodian bank, cash or securities having an
aggregate value equal to the amount of such commitment until payment is made.
Global Government may construct an investment position by combining a debt
security denominated in one currency with a forward contract calling for the
exchange of that currency for another currency.
Natural Resources, AGE, Global Bond, Global Government, Greater European, Latin
America and Japan have no specific limitations on the percentage of assets they
may commit to forward contracts, subject to their stated investment objectives
and policies, except that the funds will not enter into a forward contract if
the amount of assets set aside to cover forward contracts would impede portfolio
management or each fund's ability to meet redemption requests. Natural
Resources, AGE, Global Bond, Developing Markets, Greater European, Latin America
and Japan will use forward contracts primarily to protect the funds from adverse
currency movements. Developing Markets will not enter into forward currency
contracts if, as a result, the fund will have more than 20% of its total assets
committed to such contracts.
CURRENCY SWAPS. Mutual Shares and Discovery may participate in currency swaps. A
currency swap is an agreement to exchange cash flows on a notional amount of two
or more currencies based on the relative value differential among them. The
funds will usually enter into swaps on a net basis. The funds may participate in
currency swaps with counterparties that have received a credit rating of A-1
from S&P or P-1 from Moody's, or are of equal credit quality.
INTEREST RATE SWAPS. AGE and Global Government may participate in interest rate
swaps. An interest rate swap is the transfer between two counterparties of
interest rate obligations, one of which has an interest rate fixed to maturity
while the other has an interest rate that changes in accordance with changes in
a designated benchmark (e.g., London Interbank Offered Rate (LIBOR), prime,
commercial paper, or other benchmarks). AGE intends to participate in interest
rate swaps with regard to obligations held in its portfolio. To the extent AGE
does not own the underlying obligation, it will maintain, in a segregated
account with its custodian, cash or securities having an aggregate value equal
to the amount of the fund's outstanding swap obligation.
Options, futures, options on futures, forward currency exchange contracts,
interest rate swaps, currency swaps, CARs, and CMOs are considered "derivative
securities." For additional information about these investment techniques, see
the SAI. Investments in these instruments involve certain risks. For a
discussion of these risks, see "What are the Underlying Funds' Potential Risks?"
located elsewhere in this prospectus and "How does the Fund Invests its Assets?"
in the SAI.
TAX CONSIDERATIONS. The Underlying Funds' investments in options, futures,
forward contracts, foreign currencies and securities, and other complex
securities are subject to special tax rules that may affect the amount, timing
or character of the income earned by the Funds and distributed to you. These
special tax rules are discussed in the "Additional Information on Distributions
and Taxes" section of the SAI.
WHAT ARE THE UNDERLYING FUNDS' POTENTIAL RISKS?
GENERALLY. If the securities owned by an Underlying Fund increase in value, the
value of the shares of the Underlying Fund will increase. Similarly, if the
securities owned by an Underlying Fund decrease in value, the value of the
shares of the Underlying Fund will also decline. Such increases and decreases
will be reflected in the performance of the Underlying Funds as well as the
Funds. The value of the shares of the Growth Target Fund will tend to increase
and decrease to a greater degree than those of the other Funds due to the
increased emphasis on a more aggressive Underlying Fund mix. Similarly, the
value of the shares of the Moderate Target Fund will tend to increase and
decrease to a greater degree than the shares of the 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. The value of stock markets has
increased and decreased in the past. These changes are unpredictable.
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. Rising interest rates, which often occur
during times of inflation or a growing economy, are likely to have a negative
effect on the value of of such Underlying Fund. Interest rates have increased
and decreased in the past. These changes are unpredictable.
HIGH YIELD 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 value of high yield lower-quality, fixed-income securities tends to
reflect individual developments affecting the issuer to a greater degree than
the market value of higher-quality securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality securities
also tend to be more sensitive to economic conditions than higher-quality
securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in an
Underlying Fund's portfolio defaults, the Underlying Fund may have unrealized
losses on the security, which may lower the Fund's Net Asset Value. Defaulted
securities tend to lose much of their value before they default. Thus, the
Underlying Fund's Net Asset Value may be adversely affected before an issuer
defaults. In addition, the Underlying Fund may incur additional expenses if it
must try to recover principal or interest payments on a defaulted security. For
additional information on the risks of high yield, fixed-income securities, see
the Appendix.
FOREIGN SECURITIES. Investments in foreign securities involve additional risks,
not generally associated with investments in U.S. securities. These risks
include the possibility of expropriation, extraordinary taxation by the foreign
country, adverse fluctuations in foreign currencies which are not favorable
compared to the U.S. dollar, political or social instability of the countries
where the foreign issuers are located or where the exchange on which an
Underlying Fund purchased such securities is located, and/or future unfavorable
diplomatic developments between the U.S. and the foreign countries where the
issuers of the fund's foreign investments are located or where the exchanges on
which the fund purchased securities are located. There is always the possibility
of an Underlying Fund's assets being confiscated by foreign governments or
others. In addition, there may be less publicly available information about
foreign issuers and foreign companies may not be subject to auditing,
accounting, and financial reporting standards comparable to those applicable to
U.S. companies.
With respect to investments in developing markets, the small size, inexperience,
and limited volume of trading on securities markets in certain developing
countries may make a fund's investments in developing countries illiquid and
more volatile than investments in more developed countries, and the fund may be
required to establish special custody or other arrangements before making
certain investments in those countries. The economies of developing countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the countries with which they
trade. These economies also have been and may continue to be adversely affected
by economic conditions in the countries with which they trade. In many
developing markets, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers, and listed companies
than in the U.S. 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.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the U.S.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a fund are uninvested and no return is earned
thereon. The inability of a fund to make intended security purchases due to
settlement problems could cause the fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the fund due to subsequent declines in
value of the portfolio security or, if the fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
OPTIONS AND FUTURES. Options and futures may fail as hedging techniques where
the price movements of the securities underlying the options and futures do not
follow the price movements of the Underlying Fund's securities which are subject
to the hedge. The loss from investing in futures transactions is potentially
unlimited. Gains and losses on investments in options and futures depend on the
investment manager's ability to predict correctly the direction of securities
markets, interest rates, and other economic factors. Also, a liquid secondary
market for any particular option or future may not be available when the
investment manager wishes to "close out" a position in an option or future. In
such case, the Underlying Fund will likely be unable to control losses by
closing its position.
CURRENCY TRANSACTIONS. Currency transactions, such as forward currency exchange
contracts, currency futures and options on such futures, options on currencies,
and currency swaps are subject to different risks than other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments. These can result in losses to a fund if it is unable to deliver
or receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
INTEREST RATE SWAPS. Interest rate swaps are generally entered into to permit
the party seeking a floating rate obligation the opportunity to acquire such
obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed rate obligation the opportunity to
acquire such a fixed rate obligation, also frequently at a price lower than is
available in the capital markets. The success of such a transaction depends in
large part on the availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved.
NATURAL RESOURCES. There are a number of risks associated with investing in the
natural resources sector, including gold. Certain commodities are subject to
limited pricing flexibility as a result of supply and demand factors. Others are
subject to broad price fluctuations, reflecting the volatility of certain raw
materials' prices and the instability of supplies of other resources. Further,
many companies operate in areas of the world where they are subject to unstable
political environments, currency fluctuations, and inflationary pressures.
REAL ESTATE SECURITIES. The risks associated with investing in real estate
securities include declines in the value of real estate, risks related to
general and local economic conditions, overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
casualty or condemnation losses, variations in rental income, changes in
neighborhood values, the appeal of properties to tenants, and increases in
interest rates. The value of securities of companies which service the real
estate industry also will be affected by such risks.
In addition, equity REITs will be affected by changes in the value of the
underlying property owned by the trusts, while a mortgage real estate investment
trust will be affected by the quality of the properties to which it has extended
credit. Equity and mortgage real estate investment trusts are dependent upon the
REIT's management skill, may not be diversified, and are subject to the risks of
financing projects. REITs are also subject to heavy cash flow dependency,
defaults by borrowers, self-liquidation and the possibility of failing to
qualify for tax-free pass-through of income under the Code and to maintain
exemption from the 1940 Act. By investing in REITs indirectly, a shareholder
will bear not only his proportionate share of the expenses of the fund, but
also, indirectly, similar expenses of the REITs.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Trust and elects its
officers. The officers are responsible for the Trust's day-to-day operations.
The Board also monitors the Trust to ensure no material conflicts exist among
the Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. Advisers
also provides asset allocation services by allocating the Fund's assets among
the Underlying Funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Advisers or other direct or indirect wholly-owned subsidiaries of Resources are
the investment managers of the Underlying Funds. Together Advisers and its
affiliates manage over $223 billion in assets. Please see "Investment Advisory,
Asset Allocation and Other Services" and "Miscellaneous Information" in the SAI
for information on securities transactions and a summary of the Trust's Code of
Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
Fund's portfolio is Donald P. Gould since 1996 and Seymour R. Singer since 1996.
Donald P. Gould
Portfolio Manager of Advisers
Mr. Gould holds a Master of Business Administration degree from the Harvard
Business School and a Bachelor of Arts degree in Economics from Pomona College.
He is the founder and president of the Franklin Templeton Global Trust, formerly
the Huntington Funds of Pasadena. He joined the Franklin Templeton Group in
November 1993 upon its acquisition of certain assets of Huntington Advisers,
Inc. He has been in the securities industry since 1981.
Seymour R. Singer
Portfolio Manager of Advisers
Mr. Singer is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in Economics and Psychology from the University of California at Los Angeles.
Prior to joining the Franklin Templeton Group in 1996, Mr. Singer was a
portfolio analyst for The Carmack Group, Inc. He is a member of several
securities industry-related associations.
INVESTMENT ADVISORY AND ASSET ALLOCATION AGREEMENT. Under the investment
advisory and asset allocation agreement, Advisers provides general advisory
services. Such services include monitoring the Underlying Funds in order to
determine whether they are investing their assets in a manner that is consistent
with the asset classes targeted for investment for each Fund by Advisers.
Advisers also provides asset allocation advice and administrative services to
each Fund under the investment advisory 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.
MANAGEMENT FEES. Advisers has agreed in advance to limit its asset allocation
fee and/or make certain payments to reduce the Fund's total operating expenses
so that each Fund's direct operating expenses, including each Class Rule 12b-1
expenses, do not exceed 0.75% for Class I shares and 1.50% for Class II shares.
After July 31, 1998, Advisers may end this agreement at any time.
Each Fund, as a shareholder in the Underlying Funds, will indirectly bear its
proportionate share of any management fees and other expenses paid by the
Underlying Funds. See the SAI for more information on these fees. 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
Templeton Foreign Templeton Global 0.75%7
Advisors Limited ("TGAL")
Developing Markets Templeton Asset Management 1.25%
Ltd. - Hong Kong Branch
Smaller Companies Templeton Investment 0.75%
Counsel, Inc. ("TICI")
Foreign Smaller Advisers; TICI (sub-adviser) 1.00%8,*
Greater European TGAL 0.75%
Pacific Growth Advisers; TICI (sub-adviser) 1.00%8,*
Latin America TGAL 1.25%
Japan TICI 0.75%
Hard Currency Advisers; TICI (sub-adviser) 0.65%*
UNDERLYING FUND MANAGER FEE RATE
Global Bond TICI 0.50%9
Global Government Advisers; TICI (sub-adviser) 0.625%1,*
German Government Advisers; TICI (sub-adviser) 0.55%*
Gold Advisers 0.625%1
Natural Resources Advisers 0.625%5
1.625% of the month end net assets of the fund up to $100 million, reduced to
.50% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million.
2.625% of the month end net assets of the fund up to $100 million, reduced to
.50% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million up to $10
billion, further reduced to .44% of such net assets in excess of $10 billion up
to $12.5 billion, further reduced to .42% of such net assets in excess of $12.5
billion up to $15 billion, further reduced to .40% of such net assets in excess
of $15 billion up to $17.5 billion, further reduced to .38% of such net assets
in excess of $17.5 billion up to $20 billion, and further reduced to .36% in
excess of $20 billion.
3.625% of the average daily net assets of the fund up to $100 million, .50% of
the average daily net assets of the fund over $100 million up to $250 million,
.45% of the average daily net assets of the fund over $250 million up to $10
billion, .44% of the average daily net assets of the fund over $10 billion up to
$12.5 billion, .42% of the average daily net assets of the fund over $12.5
billion up to $15 billion, and .40% of the average daily net assets of the fund
over $15 billion.
4.75% of average daily net assets up to $500 million, .625% of average daily net
assets over $500 million up to $1 billion, and .50% of average daily net assets
over $1 billion.
5.625% of the average daily net assets of the fund up to $100 million, .50% of
the average daily net assets of the fund over $100 million up to $250 million,
.45% of the average daily net assets of the fund over $250 million up to $10
billion, .44% of the average daily net assets of the fund over $10 billion up to
$12.5 billion, .42% of the average daily net assets of the fund over $12.5
billion up to $15 billion, and .40% of the average daily net assets of the fund
over $15 billion.
6.50% of average daily net assets up to $500 million, .45% of average daily net
assets over $500 million up to $1 billion, and .40% of average daily net assets
over $1 billion.
7.75% of the average daily net assets of the Fund up to the first $200 million,
reduced to a fee of .675% of such average daily net assets in excess of $200
million up to $1.3 billion, and further reduced to a fee of .60% of such average
daily net assets in excess of $1.3 billion.
81% of daily net assets up to $100 million, .90% of daily net assets over $100
million up to $250 million, .80% of daily net assets over $250 million up to
$500 million, and .75% of daily net assets over $500 million.
9.50% of its average daily net assets, .45% of such net assets in excess of $200
million and .40% of such net assets in excess of $1.3 billion.
*TICI is entitled to receive from Advisers a sub-advisory fee; the sub-advisory
fees payable by Advisers have no effect on the fees payable by the Underlying
Funds to Advisers. As to Foreign Smaller and Pacific Growth, TICI receives from
Advisers a fee equal to an annual rate of the value of each fund's average daily
net assets as follows: .50% of such assets up to $100 million; .40% of such
assets over $100 million up through $250 million; .30% of such assets over $250
million up through $500 million; and .25% of such assets over $500 million. As
to Hard Currency and German Government, TICI receives from Advisers a fee equal
to an annual rate of .25% of the value of each fund's average daily net assets.
As to Global Government, TICI receives from Advisers a fee equal to an annual
rate of the value of the fund's assets as follows: .35% of such assets up to
$100 million; .25% of such assets over $100 million up through $250 million; and
.20% of such assets over $250 million.
OPERATING EXPENSES. Each Fund pays its own operating expenses. These expenses
include Advisers' fees associated with the provision of asset allocation
services; taxes, if any; custodian, legal and auditing fees; the fees and
expenses of Board members who are not members of, affiliated with, or interested
persons of Advisers; fees of any personnel not affiliated with Advisers;
insurance premiums; trade association dues; expenses of obtaining quotations for
calculating the Fund's Net Asset Value; and printing and other expenses that are
not expressly assumed by Advisers.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund at no charge. Please see "Investment Advisory, Asset
Allocation and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are 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; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. Commonly
used measures of performance include total return, current yield and current
distribution rate. Performance figures are usually calculated using the maximum
sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
TAXES
HOW DO TAXES AFFECT THE FUND?
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of
1997. This new law makes sweeping changes in the Code. Because many of these
changes are complex, and only indirectly affect the Fund and its distributions
to you, they are discussed in the SAI. Changes in the treatment of capital gains
and Individual Retirement Accounts ("IRAs"), however, are discussed in this
section.
TAXATION OF THE FUND AND THE UNDERLYING FUNDS' INVESTMENTS
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.
The Fund is treated as a separate entity for federal income tax purposes. Each
Fund and Underlying Fund has elected and intends to continue to qualify as a
regulated investment company under Subchapter M of the Code. By distributing all
of its income and meeting certain other requirements relating to the sources of
its income and diversification of its assets, each Fund will generally not be
liable for federal income or excise taxes.
A Fund receives income in the form of income dividends paid by the Underlying
Funds in which it invests and from any direct investments. This income, less the
expenses incurred in operations, is the Fund's net investment income. A Fund may
also receive capital gain distributions from the Underlying Funds in which it
invests and realize capital gains upon the redemption of shares of the
Underlying Funds. The Fund's net investment income and realized capital gains
will be distributed to shareholders as described below.
Some of the Underlying Funds' investments in complex securities as described in
the section "How Do the Underlying Funds Invest Their Assets?" are subject to
special tax rules. The effect of these rules may be to accelerate income, defer
losses, convert capital gains and losses into ordinary gains and losses, and to
convert long-term capital gains and losses into short-term capital gains and
losses within the Underlying Funds. These rules may also cause the Underlying
Funds to recognize income and make distributions to the Funds prior to their
receipt of cash payments. The Underlying Funds' investments in certain foreign
securities which meet the Code definition of a Passive Foreign Investment
Company ("PFIC") may also subject the Underlying Funds to an income tax and
interest charge on their investments. In these ways, these special tax rules may
affect the amount, timing or character of the income earned by the Funds, and
distributed to you. These rules are discussed in more detail in the "Additional
Information on Distributions and Taxes" section of the SAI.
HOW DO TAXES AFFECT YOUR INVESTMENT?
TAXES ON DISTRIBUTIONS
Distributions from a Fund will be taxable, whether you take them in cash or
additional shares. Distributions declared in December to shareholders of record
in that month and paid in January are taxable as if they were paid on December
31.
Distributions paid from net investment income and short-term capital gain will
be taxable as ordinary dividends. Distributions paid from long-term capital gain
will be taxable as long-term capital gain, regardless of how long you have held
your shares in the Fund. Any distributions paid in excess of the Fund's earnings
will generally be treated as non-taxable returns of capital. Dividends paid from
interest earned by the Fund on its direct investments in U.S. government
obligations may be given special tax-free status on your state income tax
return, subject in some states to the Fund satisfying minimum investment
requirements.
TAX TREATMENT OF CAPITAL GAIN DISTRIBUTIONS UNDER THE TAXPAYER RELIEF ACT OF
1997
The Taxpayer Relief Act of 1997 creates a category of long-term capital gain for
individuals that will be taxed at new lower tax rates. For investors who are in
the 28% or higher federal income tax brackets, these gains will be taxed at a
maximum of 20%. For investors who are in the 15% federal income tax bracket,
these gains will be taxed at a maximum of 10%. Capital gain distributions will
qualify for these new maximum tax rates, depending on when the Fund's securities
were sold and how long they were held by the Fund before they were sold.
Investors who want more information on holding periods and other qualifying
rules relating to these new rates should review the expanded discussion in the
SAI, or should contact their personal tax advisors.
The Fund will advise you in its annual information reporting at calendar
year-end of the amount of its capital gain distributions which will qualify for
these maximum federal tax rates. For corporate shareholders, a portion of the
dividends paid by the Fund may qualify for the corporate dividends-received
deduction. The amount so qualified depends upon the aggregate amount of
dividends received by the Underlying Funds from domestic (U.S.) corporations,
and upon other limitations which are discussed in the "Additional Information on
Distributions and Taxes" section of the SAI.
DISTRIBUTIONS TO RETIREMENT PLANS
Fund distributions received by your qualified retirement plan, such as a Section
401(k) or IRA, are generally tax-deferred; this means that you are not required
to report Fund distributions on your income tax return when paid to your plan,
but, rather, when your plan makes payments to you.
TAX TREATMENT OF INDIVIDUAL RETIREMENT ACCOUNTS UNDER THE TAXPAYER RELIEF ACT OF
1997
The Taxpayer Relief Act of 1997 creates two new IRAs which will be available to
the Fund's investors beginning on January 1, 1998.
The new "Roth IRA" will permit tax free distributions of account balances if the
assets have been invested for five years or more, and the distributions meet
certain qualifying restrictions. Investors filing as single taxpayers who have
adjusted gross incomes of $95,000 or more, and investors filing as joint
taxpayers with adjusted gross incomes of $150,000 or more may find their
participation in this IRA to be restricted.
The new education IRA is intended to help parents fund their children's
post-secondary school education. Parents or others may contribute up to $500
annually to an education IRA on behalf of any child under age 18. This IRA is
subject to the same adjusted gross income limits as the Roth IRA above, and
there are other contribution restrictions that may apply. The education IRA
earnings accumulate tax free, and assets that have accumulated in the IRA may be
distributed tax free when used to pay qualified higher education expenses.
Both new IRAs are subject to special rules and conditions that must be reviewed
by the investor when opening a new account. Additional information is available
from our Retirement Plan Services.
REDEMPTIONS AND EXCHANGES OF YOUR SHARES
If you redeem any of your shares in the Fund, or exchange your shares in the
Fund for shares of another Franklin Templeton fund, you will generally have a
capital gain or loss that must be reported on your tax return. Any loss you
realize on the redemption or exchange of your Fund shares, held for six months
or less, will be treated as a long-term capital loss to the extent of any
long-term capital gains distributions you received on these shares.
If you exchange shares that you have held for 90 days or less for shares of
another Franklin Templeton Fund, special tax rules apply. In calculating your
gain or loss on the exchange, these rules may require you not to include as part
of your cost the sales charge you paid at the time you purchased your Fund
shares. You will, however, be permitted to add the amount of sales charge
disallowed to the cost basis of the shares you received in the exchange.
ANNUAL INFORMATION RETURNS
The Funds will inform you at calendar year-end of the amount and source of the
dividends and distributions paid to you.
ADDITIONAL TAX CONSIDERATIONS
"BUYING A DIVIDEND" - If you buy shares before a dividend distribution date, you
will pay the full price for the shares and then receive a portion of the price
back in the form of a taxable distribution.
"STATE TAXES" - You should contact your tax advisor to determine whether state
or local income, intangible or other taxes will apply to your investment in the
Fund or to distributions or redemption proceeds you receive from the Fund. You
should also understand that because each of the Funds invests primarily in the
Underlying Funds, rather than in direct obligations of the U.S. government and
its territories, the Funds do not expect to pay dividends which qualify for
exemption from state income tax.
"FOREIGN TAXES" - The Underlying Funds may be subject to foreign withholding
taxes on income from their investments. The Funds will not be permitted to elect
to "pass through" to you the amount of foreign taxes paid by the Underlying
Funds on their foreign investments. Your respective share of these foreign taxes
will, therefore, be netted against your share of the Fund's other gross income
in arriving at the net investment income that the Fund distributes to you.
"NON-U.S. INVESTORS" - You should consult with your tax advisor on potential
U.S. and non-U.S. income, estate or other taxes (including U.S. income tax
withholding) on your investment in the Fund or on dividends or distributions
paid to you by a Fund.
The foregoing information is intended to summarize important tax rules that may
affect your investment in the Funds. See the Section entitled "Additional
Information on Distributions and Taxes" in the Statement of Additional
Information for a more complete discussion of these rules and other tax matters.
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 is
registered with the SEC. Each Fund offers two classes of shares: Conservative
Target Fund - Class I and Conservative Target Fund - Class II, Moderate Target
Fund - Class I and Moderate Target Fund - Class II, and Growth Target Fund -
Class I and Growth Target Fund - Class II. Additional series and classes of
shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a Board
member.
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.
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class I shares may be more attractive for long-term
investors or investors who qualify to buy Class I shares at a reduced sales
charge. Your financial representative can help you decide.
CLASS I CLASS II
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o Higher front-end sales charges o Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below.
There is no front-end sales
charge for purchases of $1
million or more.*
o Contingent Deferred Sales Charge o Contingent Deferred Sales Charge on
on purchases of $1 million or purchases sold within 18 months
more sold within one year
o Lower annual expenses than o Higher annual expenses than
Class II shares Class I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class I
shares through a Letter of Intent.
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 PERCENTAGE OF DEALER AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "Choosing a Share
Class."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR WAIVER
CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
CUMULATIVE QUANTITY DISCOUNTS - CLASS I ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - CLASS I ONLY. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the sales
charge waivers listed below apply to purchases of Class I shares only, except
for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may be
used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of shares.
Certain exceptions apply, however, to Class II shareholders who chose to
reinvest their distributions in Class I shares of the Fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in Class I shares of the
Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton Fund
if you originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your shares
from a Franklin Templeton Fund, a Contingent Deferred Sales Charge will
apply to your purchase of Fund shares and a new Contingency Period will
begin. We will, however, credit your Fund account with additional shares
based on the Contingent Deferred Sales Charge you paid and the amount of
redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Bank CD,
you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date the CD matures, including any rollover.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund or
the Templeton Variable Products Series Fund. You should contact your tax
advisor for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13-month period at least $1 million of assets held in
a fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
the order.
2. An Eligible Governmental Authority. Please consult your legal and investment
advisors to determine if an investment in the Fund is permissible and
suitable for you and the effect, if any, of payments by the Fund on
arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. 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 to be able to buy Class I shares without a front-end sales charge.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the account is closed within 365 days of the
retirement plan account's initial purchase in the Franklin Templeton Funds.
Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
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, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the shares you
want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone to apply to
your account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable sales
charge of the new fund. If you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. 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, except as noted below.
o The accounts must be identically registered. You may, however, exchange shares
from a Fund account requiring two or more signatures into an identically
registered money fund account requiring only one signature for all
transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO
BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply. Please see
"Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar quarter,
or (iii) exchanged shares equal to at least $5 million, or more than 1% of
the Fund's net assets. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Advisor Class" or "Class Z" shares. Because the
Fund does not currently offer an Advisor Class, you may exchange Advisor Class
shares of any Franklin Templeton Fund for Class I shares of the Fund at Net
Asset Value. If you do so and you later decide you would like to exchange into a
fund that offers an Advisor Class, you may exchange your Class I shares for
Advisor Class shares of that fund. Certain shareholders of Class Z shares of
Franklin Mutual Series Fund Inc. may also exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would like your
redemption proceeds wired to a bank account, your instructions
should include:
o The name, address and telephone number of the bank where you
want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the name of
the corresponding bank and the account number
2. Include any outstanding share certificates for the shares you
are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow account, you
must first sign up for the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid any delay in
processing, the instructions should include the items listed in "By
Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts may
exceed $50,000 by completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for the shares you want
to sell or you have already returned them to the Fund
o Unless you are selling shares in a Trust Company retirement plan
account
o Unless the address on your account was changed by phone within the
last 15 days
- If you do not want the ability to redeem by phone to apply to your
account, please let us know.
- --------------------------------------------------------------------------------
THROUGH
YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the Securities Dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, or (iv) the Securities Dealer of record has entered into a
supplemental agreement with Distributors
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, at a rate of up to 1% a
month of an account's Net Asset Value. For example, if you maintain an annual
balance of $1 million in Class I shares, you can redeem 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
redeemed 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 Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
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 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 Class I and Class II.
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 and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the 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. 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 shares of another Franklin Templeton Fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). Many shareholders
find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions in
Class I shares of the Fund or another Franklin Templeton Fund before November
17, 1997, may continue to do so; and (ii) Class II shareholders may reinvest
their distributions in shares of any Franklin Templeton money fund.
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. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
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 signed written instructions, 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 are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone. Please
refer to the sections of this prospectus that discuss the transaction you would
like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to ask
your investment representative for assistance or send us written instructions,
as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we are
not reasonably satisfied that the instructions are genuine. If this occurs, we
will not be liable for any loss. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. If you
would like another person or owner to sign for you, please send us a current
power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that identify the
general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to 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.
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. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
CODE NUMBER
CLASS I CLASS II
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Conservative Target Fund .............. 484 584
Moderate Target Fund .................. 485 585
Growth Target Fund .................... 486 586
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and 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)
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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 Plan Services 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
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
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.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share 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 PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing, and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
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, Developing Markets, Global Bond,
Greater European, Latin America and Japan) may not borrow money except for
temporary or emergency purposes. These Underlying Funds may borrow for such
purposes up to the amounts indicated: Equity, Growth, Utilities,
Short-Intermediate, Government Securities, AGE, Gold - 5% of total assets;
Smaller Companies and Templeton Foreign - 5% of total assets for purposes of
redeeming their shares for cancellation; Small Cap, Real Estate, Pacific Growth,
Foreign Smaller - 10% of total assets; Investment Grade - 15% of total assets;
Global Government - 30% of total assets; Natural Resources - 33% of total
assets; and German Government and Hard Currency - 331/3% of total assets.
As a fundamental investment restriction, Value, Developing Markets, Greater
European, Latin America and Japan may borrow money in an amount not exceeding
331/3% of their net assets; Global Bond may borrow money in an amount not
exceeding 30% of its assets (however, the fund's Board of Trustees has adopted a
policy of limiting the fund's borrowing to 5% of its net assets to increase
holdings of portfolio securities); and Mutual Shares and Discovery may borrow up
to 331/3% of their assets (plus 5% for emergency or short-term purposes).
BRADY BONDS. Brady Bonds involve various risk factors including residual risk
and the history of defaults with respect to commercial bank loans by public and
private entities of Brady Countries. There can be no assurance that Brady Bonds
in which Greater European or 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. In light
of the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are generally
considered speculative.
CONVERTIBLE SECURITIES, INCLUDING ENHANCED AND SYNTHETIC CONVERTIBLE SECURITIES.
Because convertible securities have features of both common stocks and debt
securities, their value can be influenced by both interest rate and market
movements. As with a debt security, a convertible security tends to increase in
value when interest rates decline and decrease in value when interest rates
rise. The price of a convertible security is also influenced by the market value
of the underlying common stock. Thus, its price tends to increase as the value
of the underlying stock rises and decrease as the value of the underlying stock
declines. In addition, because its value can be influenced by both interest rate
and market movements, a convertible security is not as sensitive to interest
rates as a similar fixed-income security, nor is it as sensitive to changes in
share price as its underlying stock.
ENHANCED CONVERTIBLE SECURITIES. Pacific Growth, Foreign Smaller, Gold, Equity,
Growth, Small Cap, 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 investors, 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 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. The fund, however, intends to acquire liquid securities, though there
can be no assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. Value, Pacific Growth and Foreign Smaller may invest
portions of their assets in "synthetic convertible" securities. A synthetic
convertible is created by investing in nonconvertible fixed-income securities
and in warrants or stock or stock index call options which grant the holder the
right to purchase a specified quantity of securities within a specified period
of time at a specified price or to receive cash in the case of stock index
options. Synthetic convertible securities are generally not considered to be
"Equity Securities" for the purposes of each Fund's investment policy regarding
those securities.
Synthetic convertible securities differ from the true convertible security 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
expects normally 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 a fund's investment objectives. 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 U.S. 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, Hong Kong and/or Latin America. For a further discussion of these risks,
please see the SAI.
EQUIPMENT RELATED INSTRUMENTS. Global Government may purchase equipment trust
certificates, equipment lease certificates, and conditional sales contracts.
Equipment related instruments are used to finance the acquisition of new
equipment. The instrument gives the bondholder the first right to the equipment
in the event that interest and principal are not paid when due. Title to the
equipment is held in the name of the trustee, usually a bank, until the
instrument is paid off. Equipment related instruments usually mature over a
period of 10 to 15 years. In practical effect, equipment trust certificates,
equipment lease certificates and conditional sales contracts are substantially
identical; they differ mainly in legal structure. These fixed-income securities
may involve equity features, such as conversion or exchange rights or warrants
for the acquisition of stock of the same or a different issuer; participation
based on revenues, sales or profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common stock are offered as a
unit).
GERMAN GOVERNMENT BONDS. The primary risk factors associated with investment in
German government obligations arise in connection with market fluctuations in
the level of German interest rates and in the exchange rate between the U.S.
dollar and the German mark. At any given point in time, the impact of interest
rate and currency exchange rate changes on German Government's Net Asset Value
may be reinforcing or offsetting.
The yield and total return of German Government may be higher or lower than the
yield and total return of a fund investing in U.S. dollar-denominated bonds of
comparable maturity and quality. In addition, due to periodic interest rate and
exchange rate volatility, the fund's Net Asset Value is likely to experience
significant volatility from time to time, and this volatility may be greater
than would be experienced by a comparable U.S. dollar-denominated bond fund.
Because of its investment primarily in German mark-denominated obligations and
its policy of not hedging currency risk, German Government's Net Asset Value
will likely exhibit greater day-to-day volatility than a fund that diversifies
its currency risk across multiple currencies and/or regularly hedges its
currency risk. Even though interest rates on German government obligations may
from time to time exceed the rates on U.S. dollar-denominated bonds of
comparable maturity and quality, a decline in the German mark relative to the
U.S. dollar over any given period could more than offset any interest rate
advantage, resulting in a negative total return for German Government over that
period.
German interest rates and currency valuations have fluctuated unpredictably in
the past and can be expected to do so in the future.
The following information is a brief summary of factors affecting German
Government and does not purport to be a complete description of such factors.
The information is based primarily upon information derived from public
documents relating to securities offerings of issuers of German government
obligations, from independent credit reports and historically reliable sources,
but has not been independently verified by German Government, the Underlying
Funds or the Funds.
The Federal Republic of Germany, which comprises what was formerly the nations
of East Germany and West Germany, is considered by the rating agencies and by
the fund's investment managers to be among the world's most creditworthy issuers
of debt obligations. Both S&P and Moody's have assigned their highest ratings
(AAA/Aaa) to 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 YIELD, FIXED-INCOME SECURITIES. High yield, fixed-income securities
frequently have call or buy-back features that allow an issuer to redeem the
securities from a Fund or Underlying Fund. Although these securities are
typically not callable for a period of time, usually three to five years from
the date of issue, if an issuer calls its securities during periods of declining
interest rates, the investment manager may find it necessary to replace the
securities with lower-yielding securities, which could result in less net
investment income for the fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Underlying Fund may have to accrue income on defaulted
securities and distribute the income to shareholders for tax purposes, even
though the Fund is not currently receiving interest or principal payments on the
defaulted securities. To generate cash to satisfy these distribution
requirements, the fund may have to sell portfolio securities that it otherwise
may have continued to hold or use cash flows from other sources, such as the
sale of Fund shares.
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 an Underlying 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, Growth, Utilities, Gold, Natural Resources, Small Cap, Real Estate,
Value, AGE, Foreign Smaller and Global Government may buy high yield,
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 Securities Act of 1933, which
entails special responsibilities and liabilities. A fund may also incur special
costs in disposing of restricted securities, although the fund will generally
not incur any costs when the issuer is responsible for registering the
securities.
Equity, Growth, Utilities, Gold, Natural Resources, Small Cap, Real Estate,
Value, AGE, Foreign Smaller and Global Government may buy high yield,
fixed-income securities during an initial underwriting. These securities involve
special risks because they are new issues. The investment manager 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 before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer.
Factors adversely impacting the market value of high yield securities may lower
the Underlying Fund's Net Asset Value. In addition, a fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings.
ILLIQUID SECURITIES. An illiquid security is a security that cannot be sold
within seven days in the normal course of business for approximately the amount
at which the fund has valued the security. Equity, Growth, Utilities, Small Cap,
Value, Real Estate, Short-Intermediate, Government Securities, Investment Grade,
AGE, Hard Currency, Developing Markets, Templeton Foreign, Smaller Companies,
Global Bond, Global Government, Pacific Growth, Foreign Smaller, German
Government and Gold may not purchase an illiquid security if, at the time of
purchase, the fund would have more than 10% of its total net assets invested in
such securities. Natural Resources, Mutual Shares, Discovery, 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. Because Japan will, under normal conditions, invest at least
80% of its assets in equity securities of Japanese issuers, the fund's
performance is expected to be closely tied to economic and political conditions
in Japan, and its performance is expected to be more volatile than more
geographically diversified funds. Changes in regulatory, tax or economic policy
in Japan could significantly affect the Japanese securities markets and
therefore the fund's performance.
Japan's economic growth has declined significantly since 1990. The general
government position has deteriorated as a result of weakening economic growth
and stimulative measures taken to support economic activity and to restore
financial stability. Although the decline in interest rates and fiscal
stimulation packages have helped to contain recessionary forces, uncertainties
remain. Japan is also heavily dependent upon international trade, so its economy
is especially sensitive to trade barriers and disputes. In addition, Japan's
banking industry is undergoing problems related to bad loans and declining
values in real estate.
The common stocks of many Japanese companies trade at high price-earnings
ratios. Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other countries,
especially the U.S. 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 U.S.
There are further risks specific to investments in Japan, for a further
discussion of these risks, please see the SAI.
LOAN PARTICIPATIONS. AGE, Value, Mutual Shares, Discovery and Global Government
are authorized to acquire loan participations in which the funds will purchase
from a lender a portion of a larger loan which it has made to a borrower.
Generally, such loan participations are sold without guarantee or recourse to
the lending institution and are subject to the credit risks of both the borrower
and the lending institution. Such loan participations, however, may enable the
fund to acquire an interest in a loan from a financially strong borrower which
it could not do directly. While loan participations generally trade at par
value, the funds will be permitted to purchase such securities which sell at a
discount because of the borrower's credit problems. To the extent the borrower's
credit problems are resolved, such loan participations may appreciate in value.
Loan participations carry substantially the same risks as those for defaulted
debt obligations and may cause loss of the entire investment. AGE's investment
in loan participations, some of which may be in default, and other defaulted
securities will represent no more than 15% of the fund's net assets at the time
of investment, subject to AGE's policy concerning illiquid securities to the
extent that certain participations are considered to be illiquid. With respect
to Value, Mutual Shares and Discovery, loan participations will be included in
the funds' limitation on illiquid securities.
LOANS OF PORTFOLIO SECURITIES. Equity, Growth, Utilities, Small Cap, Value,
Natural Resources, Real Estate, Short-Intermediate, Investment Grade, AGE,
Mutual Shares, Discovery, Greater European, Developing Markets, German
Government, Latin America, Japan, Hard Currency, Global Bond, Pacific Growth,
Foreign Smaller and Gold may lend securities they have purchased to certain
securities dealers or other institutional investors, so long as the total amount
of the loans does not exceed 10% of the value of each of Short-Intermediate's,
Equity's, Growth's, Real Estate's, Utilities', AGE's and Gold's total assets,
20% of Small Cap's total assets, 25% of Value's total assets, 30% of Investment
Grade's, Global Government's, German Government's and Hard Currency's total
assets, 33% of Natural Resources' total assets and, 331/3% of Greater
European's, Pacific Growth's, Foreign Smaller's, Latin America's, Japan's,
Global Bond's and Developing Markets' total assets. Investment Grade, Mutual
Shares and Discovery intend to limit such borrowing to 5% of their respective
total assets at the time of the most recent loan.
The borrower must deposit with the Fund's custodian bank collateral with an
initial market value of at least 100% of the market value of the securities
loaned, including accrued interest, with the value of the collateral and loaned
securities marked-to-market daily to maintain collateral coverage of at least
100% (102% in the case of Short-Intermediate and Global Government). This
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Funds may engage
in security loan arrangements with the primary objective of increasing their
income either through investing cash collateral in short-term interest-bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, they continue to be entitled to all dividends or
interest on any loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the collateral should the
borrower of the security fail financially.
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.
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 the
federal securities laws, Value, Natural Resources, Real Estate, Global Bond,
German Government, Hard Currency and Global Government may concentrate their
investments in the securities of a smaller number of issuers than if they were
diversified companies. An investment in a non-diversified fund entails greater
risk than an investment in a diversified investment company because a higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the fund's portfolio, and economic, political, or
regulatory developments may have a greater impact on the value of the fund's
portfolio than would be the case if the portfolio were diversified among more
issuers.
PUBLIC UTILITIES SECURITIES. The risks of investments in the Public Utilities
Industry include: risks associated with regulatory changes; risks associated
with interest rate fluctuations; the difficulty of obtaining adequate returns on
invested capital in spite of frequent rate increases; the difficulty of
financing large construction programs during inflationary periods; restrictions
on operations and increased costs and delays attributable to environmental
considerations; difficulties of the capital markets in absorbing utility debts
and equity securities; difficulties in obtaining fuel for electric generation at
reasonable prices; risks associated with the operation of nuclear power plants;
and general effects of energy conservation.
REITS AND OTHER REAL ESTATE-RELATED INVESTMENTS. Equity, Developing Markets,
AGE, Small Cap, Natural Resources, Smaller Companies, Foreign, Greater European,
Pacific Growth, Foreign Smaller, Global Bond, Real Estate, Latin America and
Japan may invest in entities which qualify as REITs for federal income tax
purposes or in other marketable securities secured by real estate or interests
therein. In order to qualify as a REIT, a company must invest primarily in real
estate-related investments, and distribute virtually all of its taxable income
to shareholders. Equity does not intend to invest more than 10% of its total
assets in REITs. AGE, Natural Resources and Developing Markets will not invest
more than 10% of their assets in REITs.
REIT investments are subject to risks common to all real estate investing,
namely declines in the value of real estate, changes in general and local
economic conditions, overbuilding and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, variations in rental income, changes in neighborhood
values, the appeal of properties to tenants, and increases in interest rates.
REITs are also subject to a number of risks directly related to their
operations. For example, the success of a REIT depends upon large inflows of
cash flowing from the underlying real estate investments. REITs are also subject
to the possibility of failing to qualify for tax-free pass-through of income
under the Code and to maintain exemption from the federal securities law
registration requirements.
REPURCHASE AGREEMENTS. Each Fund and Underlying Fund except Government
Securities may engage in repurchase agreement transactions. In a repurchase
agreement, the fund buys U.S. government securities from a bank or broker-dealer
at one price and agrees to sell them back to the bank or broker-dealer at a
higher price on a specified date. The securities subject to resale are held on
behalf of the Fund by a custodian bank approved by the Underlying Fund's Board
of Directors or Board of Trustees. The bank or broker-dealer must transfer to
the custodian bank securities with an initial market value of at least 102% of
the repurchase price to help secure the obligation to repurchase the securities
at a later date. The securities are then marked-to-market daily to maintain
coverage of at least 100%. If the bank or broker-dealer does not repurchase the
securities as agreed, the fund may experience a loss or delay in the liquidation
of the securities underlying the repurchase agreement and may also incur
liquidation costs. The fund, however, intends to enter into repurchase
agreements only with banks or broker-dealers that are considered creditworthy by
Advisers.
RESTRICTED SECURITIES. Certain of the Underlying Funds may invest a specific
percentage of their total assets in restricted securities. Restricted securities
involve certain risks, including the risk that a secondary market may not exist
when a holder wants to sell them. In addition, the price and valuation of these
securities may reflect a discount because they are perceived as having less
liquidity than the same securities that are not restricted. If a fund suddenly
has to sell restricted securities, time constraints or lack of interested,
qualified buyers may prevent the fund from receiving the value at which the
securities are carried on the books of the fund at the time of the sale.
Alternatively, the investment manager may sell unrestricted securities it might
have retained if the fund had only held unrestricted securities.
REVERSE REPURCHASE AGREEMENTS. Small Cap, Global Government, Short-Intermediate
and Natural Resources may enter into reverse repurchase agreements. These
agreements involve the sale of securities held by the funds pursuant to an
agreement to repurchase the securities at an agreed-upon price, date, and
interest payment. When entering into reverse repurchase transactions, cash or
securities of a dollar amount equal in value to the funds' obligation under the
agreement, including any earned but unpaid interest, will be maintained in a
segregated account with each fund's respective custodian bank. The value of the
securities subject to the reverse repurchase agreement will be determined daily.
Reverse repurchase agreement transactions involve the risk that the market value
of the securities sold by the fund may decline below the repurchase price of the
securities subject to the agreement and the risk that a default by the purchaser
may cause the fund to experience a loss.
SHORT SALES. Value may make short sales and short sales "against the box" up to
25% of its net assets. At any time, it will not have more than 15% of the value
of its net assets in deposits or short sales "against the box." Global
Government may make short sales "against the box," provided that it will not
have more than 10% of its Net Asset Value held as collateral for such short
sales. Mutual Shares and Discovery 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 high-grade
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, Japan, 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
(CDs, 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 may invest a portion of
their assets in trade claims. Trade claims are purchased from creditors of
companies in financial difficulty. For purchasers such as these funds, trade
claims offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, may generate capital
appreciation in the event that the value of the claim increases as the debtor's
financial position improves. In the event that the debtor is able to pay the
full obligation on the face of the claim as a result of a restructuring or an
improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price. AGE's investment in these
instruments will not exceed, and Value intends to limit these investments to no
more than, 5% of their respective net assets at the time of purchase. Trade
claims are generally liquid as there is a secondary market, but the boards of
the funds will monitor their liquidity.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trading in claims is not regulated by federal
securities laws or the SEC. Currently, trading in claims is regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade claims
may have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding.
U.S. TREASURY ROLLS. Investment Grade may enter into "U.S. Treasury rolls" in
which the fund sells outstanding U.S. Treasury securities and buys back
"when-issued" U.S. Treasury securities of slightly longer maturity for
simultaneous settlement on the settlement date of the "when-issued" U.S.
Treasury security. During the period prior to settlement date, the fund
continues to earn interest on the securities it is selling. It does not earn
interest on the securities that it is purchasing until after settlement date.
With respect to these transactions, Investment Grade could suffer an opportunity
loss if the counterparty to the roll failed to perform its obligations on
settlement date, and if market conditions changed adversely. The fund intends,
however, to enter into U.S. Treasury rolls only with government securities
dealers recognized by the Federal Reserve Board or with member banks of the
Federal Reserve System.
VALUE INVESTING. Value will invest principally in the securities of companies
believed by the investment manager to be undervalued. Securities of a company
may be undervalued as a result of overreaction by investors to unfavorable news
about a company, industry, the stock market in general, or as a result of a
market decline, poor economic conditions, tax-loss selling or actual or
anticipated unfavorable developments affecting a company. Often these companies
are attempting to recover from business setbacks or adverse events
(turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which Value may invest tend to increase in value more quickly
during economic upturns than noncyclical stocks, but they also tend to lose
value more quickly in economic downturns. As with all investments, there is
always the possibility when investing in these securities that the investment
manager may be incorrect in its assessment of a particular industry or company
or that the investment manager may not purchase these securities at their lowest
possible prices or sell them at their highest.
Value's purchase of securities of companies emerging from bankruptcy may present
risks that do not exist with other investments. Companies emerging from
bankruptcy may have some difficulty retaining customers and suppliers who prefer
transacting with solvent organizations. If new management is installed in a
company emerging from bankruptcy, the management may be considered untested; if
the existing management is retained, the management may be considered
incompetent. Further, even when a company has emerged from bankruptcy with a
lower level of debt, it may still retain a relatively weak balance sheet. During
economic downturns these companies may not have sufficient cash flow to pay
their debt obligations and may also have difficulty finding additional
financing. In addition, reduced liquidity in the secondary market may make it
difficult for the fund to sell the securities or to value them based on actual
trades.
Value's policy of investing in securities that may be out of favor, including
turnarounds, cyclicals, and companies emerging from bankruptcy, companies
reporting poor earnings, and companies whose share prices have declined sharply
or which are not widely followed, differs from the approach followed by many
other mutual funds. The investment manager believes, however, that these
securities may provide a greater total investment return than securities whose
prices appear to reflect anticipated favorable developments.
WHEN-ISSUED, DELAYED DELIVERY, AND TO-BE-ANNOUNCED TRANSACTIONS. Natural
Resources, Real Estate, Short-Intermediate, AGE, German Government, Global
Government and Global Bond may purchase and sell obligations on a "when-issued"
or "delayed delivery" basis. Natural Resources, AGE, Short-Intermediate and
Global Government are not subject to any percentage limit with respect to these
types of obligations. German Government may only invest up to 25% of its assets
in such transactions. These transactions are arrangements in which a fund
purchases securities with payment and delivery scheduled for a future time,
generally within two weeks. Although AGE, Real Estate, Natural Resources and
Short-Intermediate will generally purchase securities on a when-issued basis
with the intention of acquiring the securities, they may sell the securities
before the settlement date if it is deemed advisable. When a fund is the buyer
in these transactions, it will maintain with its custodian bank, in an account
that is separate and apart from its normal custody account, cash or securities
having a total value equal to the amount of the fund's commitment until payment
for the obligation is made. Government Securities may purchase and sell GNMA
certificates on a "To-Be-Announced" ("TBA") and "delayed delivery" basis, and is
not subject to any percentage limit with respect to these transactions. These
transactions are arrangements under which the fund may purchase securities with
payment and delivery scheduled for a future time up to 60 days after purchase.
Purchases of securities on a when-issued, delayed delivery or TBA basis are
subject to market fluctuation and the risk that the value or yields at delivery
may be more or less than the purchase price or the yields available when the
transaction was entered into. If the other party to a when-issued, delayed
delivery or TBA transaction fails to complete the transaction, the fund could
miss a favorable price or yield opportunity. Securities purchased on a
when-issued, delayed delivery or TBA basis do not generally earn interest until
their scheduled delivery date.
ZERO COUPON AND PAY-IN-KIND BONDS. The credit risk factors pertaining to lower
rated securities also apply to lower rated zero coupon, deferred interest, and
pay-in-kind bonds. These bonds carry an additional risk in that, unlike bonds
that pay interest throughout the period to maturity, the fund will realize no
cash until the cash payment date and, if the issuer defaults, the fund may
obtain no return at all on its investment. Zero coupon, deferred interest, and
pay-in-kind bonds involve additional special considerations.
Zero coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security, and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Mutual Shares, Discovery, Smaller Companies, Templeton Foreign, Greater
European, Latin America, Japan, Global Bond, AGE and Value may purchase
pay-in-kind bonds. Pay-in-kind bonds are securities that pay interest through
the issuance of additional bonds. The fund will be deemed to receive interest
over the life of such bonds and be treated as if interest were paid on a current
basis for federal income tax purposes, although no cash interest payments are
received by the fund until the cash payment date or until the bonds mature.
Accordingly, during periods when the fund receives no cash interest payments on
its zero coupon securities or deferred interest or pay-in-kind bonds, it may be
required to dispose of portfolio securities to meet distribution requirements
and such sales may be subject to the risk factors discussed above. AGE and Value
are not limited in the amount of their assets that may be invested in these
securities.
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal paper
investments permitted to be made by the Fund, are opinions of the ability of
issuers to repay punctually their promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following designations,
all judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FGF10/97 FAS P 12/97
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?.............................. 2
Investment Restrictions........................................... 14
Officers and Trustees............................................. 15
Investment Advisory, Asset Allocation
and Other Services............................................... 19
How does the Fund Buy
Securities for its Portfolio?.................................... 20
How Do I Buy, Sell
and Exchange Shares? ............................................ 21
How are Fund Shares Valued?....................................... 24
Additional Information on
Distributions and Taxes.......................................... 25
The Fund's Underwriter............................................ 32
How does the Fund
Measure Performance?............................................. 34
Miscellaneous Information......................................... 37
Financial Statements.............................................. 39
Useful Terms and Definitions ..................................... 39
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
Franklin Templeton Fund Allocator Series (the "Trust") is an open-end management
investment company consisting of three separate non-diversified series: Franklin
Templeton Conservative Target Fund, Franklin Templeton Moderate Target Fund and
Franklin Templeton Growth Target Fund. Each series may be individually or
together be referred to as the "Fund(s)." 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 Prospectus, dated December 1, 1997, 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.
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 Prospectus, the "Underlying Fund(s)" are the Franklin
Templeton Funds in which each Fund primarily invest its assets. Each Fund may
also 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 the Underlying Funds may engage.
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?";
"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 the 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.
The 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; the 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.
The 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 the 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 the 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 of the Underlying Funds may engage in forward
conversions. In a forward conversion, the 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 the fund's total return if the conversion is terminated prior to the
expiration date of the option. In such event, the fund's return on forward
conversions may be greater or less than it would have been if it had hedged the
security only by purchasing put options.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, the
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," the 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"). The fund may enter into such Futures Transactions on domestic
exchanges and, to the extent such transactions have been approved by the CFTC
for sale to customers in the U.S., on foreign exchanges.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian, cash or U.S. Treasury obligations equal
to a specified percentage of the value of the futures contract (the "initial
margin"), as required by the relevant contract market and futures commission
merchant. The futures contract will be marked-to-market daily. Should the value
of the futures contract decline relative to the fund's position, the fund will
be required to pay to the futures commission merchant an amount equal to such
change in value. In the event the fund has insufficient cash, it may have to
sell portfolio securities at a time when it may be disadvantageous to do so in
order to meet such daily variation margins.
A futures contract may generally be described as an agreement between two
parties to buy and sell particular financial instruments for an agreed price
during a designated month (or to deliver the final cash settlement price, in the
case of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, each fund can
seek, through the sale of futures contracts, to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
the 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, the 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. The 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. The 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, the 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 the 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, the fund obtains the benefit of the futures position if prices move in
a favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
FINANCIAL FUTURES CONTRACTS. Financial futures are contracts that obligate the
holder to take or make delivery of a specified quantity of a financial
instrument, such as a U.S. Treasury security or foreign currency, during a
specified future period at a specified price. A "sale" of a financial futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
A "purchase" of a financial futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date.
INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts are futures
contracts on debt securities. The value of these instruments changes in response
to changes in the value of the underlying debt security, which depends primarily
on prevailing interest rates.
The 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 the 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 the 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 the 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 the 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, the 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 the 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. The
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 the Underlying 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. The fund may enter into currency futures
contracts traded on regulated commodity exchanges, including non-U.S. exchanges.
The Underlying Funds 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 the 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 the 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 the 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 the 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. The Underlying 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, the 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 the fund's portfolio.
A call option written by the 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 the 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 the 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.
The fund may terminate its obligations under a call or put option by purchasing
an option identical to the one it has written. This purchase is referred to as
"closing purchase transaction." The fund would also be able to enter into a
closing sale transaction in order to realize a gain or minimize a loss on an
option purchased by the fund.
The purchase of a call option would entitle the fund, in return for the premium
paid, to purchase specified currency at a specified price during the option
period. The fund would ordinarily realize a gain if, during the option period,
the value of the 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. The 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.
The Underlying 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 the
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 the fund's
portfolio securities due to currency exchange rate fluctuations. The 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 the 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 the
fund's futures positions and portfolio positions will be impossible to achieve.
Accordingly, successful use by the 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 the Underlying Fund's investment manager is not
successful in employing such instruments in managing the fund's investments, the
fund's performance will be worse than if it did not employ such strategies. In
addition, the fund will pay commissions and other costs in connection with the
investments, which may increase the fund's expenses and reduce the return. In
writing options on futures, the 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. There are, however, 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 the fund's ability to effectively hedge its securities or
foreign currency exposure.
When trading options on foreign exchanges or in the OTC market many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
In the case of OTC options, there can be no assurance that a continuous liquid
secondary market will exist for any particular OTC option at any specific time.
Consequently, the fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale transaction with
the dealer that issued it. Similarly, when the fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer 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 the 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 the 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 U.S. and which
are publicly traded in the U.S. 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 U.S.
will have to be made in compliance with any applicable U.S. 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 U.S. 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 the Underlying Funds 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 U.S. 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 the 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 the 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 U.S. securities
markets, and should be considered highly speculative. Such risks include: (i)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (ii) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (iii) pervasiveness of corruption and crime in the Russian economic
system; (iv) currency exchange rate volatility and the lack of available
currency hedging instruments; (v) higher rates of inflation (including the risk
of social unrest associated with periods of hyperinflation); (vi) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
the 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 the 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 the fund to lose its
registration through fraud, negligence or even mere oversight. While the
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 the 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 the 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 the
Underlying Fund from investing in the securities of certain Russian companies
deemed suitable by its investment manager. Further, this could cause a delay in
the sale of Russian company securities by the 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 U.S. 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 U.S., 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 the 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 U.S. 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 U.S., Canada, the United Kingdom, Germany,
Australia, Korea, Taiwan and the People's Republic of China (including Hong
Kong). The principal sources of its imports are the U.S., Southeast 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 U.S., 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.
INVESTMENTS IN HONG KONG. Hong Kong reverted to the sovereignty of China on July
1, 1997. As with any major political transfer of power, this could result in
political, social, economic, market or other developments in Hong Kong, China or
other countries that could affect the value of investments of the Underlying
Funds and the Funds.
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.
The fund's assets will be invested in gold bullion at such times as the
prospects of such investments are, in the opinion of the fund's investment
manager, 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
U.S. 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 the Underlying Fund does not exercise or dispose
of a warrant prior to its expiration, it will expire worthless.
SHORT-SELLING
In a short sale, the 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.
The 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.
The Underlying Fund will place in a segregated account with its custodian bank
an amount equal to the difference between (a) the market value of the securities
sold short at the time they were sold short and (b) any cash or securities
required to be deposited as collateral with the broker in connection with the
short sale (not including the proceeds from the short sale). The segregated
account will be marked-to-market daily and at no time will the amount deposited
in the segregated account and with the broker as collateral be less than the
market value of the securities at the time they sold short.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. Each Fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except it may borrow up
to 331/3% of its total assets (including the amount borrowed) to meet redemption
requests that might otherwise require the untimely disposition of portfolio
securities or for other temporary or emergency purposes and may pledge its
assets in connection with these borrowings. The Fund may (a) borrow in
connection with short sales and "short sales against the box;" (b) borrow from
banks or other persons to the extent permitted by applicable law; (c) enter into
reverse repurchase agreements; (d) obtain short-term credit necessary for the
clearance of purchases and sales of its portfolio securities; and (e) make
margin payments in connection with futures, options and currency transactions.
2. Underwrite securities of other issuers, except insofar as the Fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests, except that the Fund could own real estate directly as a result of a
default on debt securities it owns. This restriction does not preclude
investments in marketable securities of issuers engaged in these activities.
4. Loan money, except as is consistent with the Fund's investment objective, and
except that the Fund may (a) buy a portion of an issue of publicly distributed
bonds, debentures, notes and other evidences of indebtedness, (b) enter into
repurchase agreements, (c) lend its portfolio securities, and (d) participate in
an interfund lending program with other Franklin Templeton Funds to the extent
permitted by the 1940 Act and any rules or orders thereunder.
5. Issue securities senior to the Fund's presently authorized shares of
beneficial interest, except that the Fund may borrow as permitted by these
restrictions.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity 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 the Fund to
engage in investment strategies indirectly that are prohibited under the
investment restrictions listed above. The investment restrictions of the
Underlying Funds are located in their respective 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 each Fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the Trust under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 29 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 53 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 55 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 54 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 58 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68) Trustee
20833 Stevens Creek Blvd.,
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (69) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 50 of the investment companies in
the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare Investors, and President, National Association
of Securities Dealers, Inc.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 58 of the investment companies in the Franklin
Templeton Group of Funds.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 58 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 58 of the
investment companies in the Franklin Templeton Group of Funds.
Donald P. Gould (39) President
777 Mariners Island Blvd.
San Mateo, CA 94404
Managing Director, Templeton Worldwide, Inc. from November 1993 to 1996;
Executive Vice President, Franklin Institutional Services Corporation; from
January 1995 to present, Executive Vice President of Templeton Franklin
Investment Services, Inc.; from February 1992 to November 1993, independent
consultant to the 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); and officer and/or
trustee of two investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 35 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board may in the future
be, but are not currently, paid fees. As shown above, the nonaffiliated Board
members also serve as directors or trustees of other investment companies in the
Franklin Templeton Group of Funds. They may receive fees from these funds for
their services. The following table provides the total fees paid to
nonaffiliated Board members by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN
RECEIVED FROM TEMPLETON
THE FRANKLIN GROUP OF FUNDS
TEMPLETON GROUP ON WHICH EACH
NAME OF FUNDS* SERVES**
------------------------------------------------------------------------
Frank H. Abbott, III .................... $165,236 29
Harris J. Ashton ........................ 343,591 53
S. Joseph Fortunato ..................... 360,411 55
David Garbellano*** ..................... 148,916 27
Frank W.T. LaHaye ....................... 139,233 27
Gordon S. Macklin ....................... 335,541 50
*For the calendar year ended December 31, 1996.
**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 58 registered investment companies, with approximately 171 U.S. based
funds or series.
***Deceased, September 27, 1997.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of November 3, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 2,519
Class I shares of Moderate Target Fund and 2,515 Class I shares of Growth Target
Fund. Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
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 the Fund. 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 Fund
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 each Fund to buy, hold or sell and the selection of
brokers through whom the Fund's portfolio transactions are executed. Advisers'
activities are subject to the review and supervision of the Board to whom
Advisers renders periodic reports of each Fund's investment activities. Advisers
and its officers, directors and employees are covered by fidelity insurance for
the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
Advisers receives no fees from the Funds for the services provided under the
investment advisory and administrative services agreement, except for the asset
allocation services, which are provided 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.
For the fiscal year ended July 31, 1997, fees for asset allocation services,
before any advance waiver, totaled $2,583 for the Conservative Target Fund,
$13,870 for the Moderate Target Fund and $5,826 for the Growth Target Fund.
Under an agreement by Advisers to waive its fees, The Funds paid no asset
allocation services fees for the period.
INVESTMENT ADVISORY AND ASSET ALLOCATION AGREEMENT. The investment advisory and
asset allocation agreement is in effect until February 28, 1998. It may continue
in effect for successive annual periods if its continuance is specifically
approved at least annually by a vote of the Board or by a vote of the holders of
a majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the investment
advisory and asset allocation 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 on 60 days' written
notice to Advisers or by Advisers on 60 days' written notice to the Fund, and
will automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund at no charge. These include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements. FT Services is a wholly owned
subsidiary of Resources.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIANS. Investors Services, in its capacity as the transfer agent for the
Underlying Funds, effectively acts as the Fund's custodian and holds the Fund's
shares of the Underlying Funds on its books. Bank of New York, Mutual Funds
Division, 90 Washington Street, New York, New York, 10286, acts as custodian of
the Fund's cash pending investment in shares of the Underlying Funds, as well as
other securities and assets of the Fund. The custodian does not participate in
decisions relating to the purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105 are the Trust's independent auditors. During the fiscal year ended July
31, 1997 their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended 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.
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions 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. For portfolio
transactions 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 are based to a large degree on the professional opinions of the persons
responsible for placement and review of the transactions. These opinions are
based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
Most fixed income securities purchased 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 Advisers receives 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 staffs 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, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to 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.
During the fiscal year ended July 31, 1997, the Funds paid no brokerage
commissions on transactions allocated to brokers.
As of July 31, 1997, the Funds did not own securities of their regular
broker-dealers.
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:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
- -------------------------------------------------------------------
Under $30,000.................................... 3.0%
$30,000 but less than $50,000.................... 2.5%
$50,000 but less than $100,000................... 2.0%
$100,000 but less than $200,000.................. 1.5%
$200,000 but less than $400,000.................. 1.0%
$400,000 or more................................. 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may 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 without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy 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 acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the
13-month period, there will be an upward adjustment of the sales charge,
depending on the amount actually purchased (less redemptions) during the period.
The upward adjustment does not apply to certain retirement plans. If you execute
a Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the prior business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
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 any efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the scheduled close of the
NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. 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
NYSE.
The following discussion addresses circumstances where a Fund purchases
securities directly. Portfolio securities listed on a securities exchange or on
the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is no
such reported sale, within the range of the most recent quoted bid and ask
prices. Over-the-counter portfolio securities are valued within the range of the
most recent quoted bid and ask prices. Portfolio securities that are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Net Asset Value of each
class. If events materially affecting the values of these foreign securities
occur during this period, the securities will be valued in accordance with
procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
1. INCOME DIVIDENDS.
The Underlying Funds receive income generally in the form of dividends,
interest, original issue, market and acquisition discount and other income
derived from its investments. This income, less the expenses incurred in the
Underlying Funds' operations, is the net investment income of the Underlying
Funds from which income dividends may be paid to the Fund. This income of the
Fund, together with any income on direct investments made by the Fund (net of
any direct expenses of the Fund), in turn becomes the basis for the Fund's
distributions to you out of net investment income. Thus, the amount of dividends
paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS.
The Underlying Funds may derive capital gains or losses in connection with sales
or other dispositions of their portfolio securities. To the extent that an
Underlying Fund earns a net short-term capital gain (an excess of net short-term
capital gain over net long-term capital loss) during its fiscal year, each
Fund's respective portion of that gain will be distributed to the Fund as an
ordinary dividend and will become part of the Fund's net investment income as
described immediately above. If the Underlying Fund earns a net capital gain (an
excess of net long-term capital gain over net short-term capital loss), the
Fund's respective portion of that gain, including any short-term gains realized
by the Fund on redemption of shares of the Underlying Funds, will be distributed
to the Fund as a capital gain dividend, and will become part of the Fund's
long-term capital gain. It is unlikely that any of the Funds will realize any
significant short-term capital gain on its direct investments in securities, but
to the extent that it does so, that gain, including any short gains realized by
the Fund or redemption of the shares of the Underlying Funds, when distributed
to you will be taxable as ordinary income. Distributions paid to you from net
capital gain on direct investments made by the Fund, including any long-term
capital gains realized by the Fund or redemptions of the shares of the
Underlying Funds, and from capital gain dividends paid to the Fund by any of the
Underlying Funds will be taxable to you as long-term capital gain, regardless of
how long you have held your shares in the Fund. Distributions of net short-term
and long-term capital gain can only be made by the Underlying Funds or the Fund
to the extent that each Fund's net short-term and long-term capital gain exceeds
any available capital loss carryovers. Any resulting net short-term or long-term
capital gains will generally be distributed once each year, and may be
distributed more frequently, if necessary, in order to reduce or eliminate
federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
track its sales of portfolio securities and to report its capital gain
distributions to you according to the following categories of holding periods:
"Pre-Act long-term capital gains": securities sold by the Fund before May 7,
1997, that were held for more than 12 months. These gains will be taxable to
individual investors at a maximum rate of 28%.
"Mid-term capital gains": securities sold by the Fund after July 28, 1997 that
were held more than one year but not more than 18 months. These gains will be
taxable to individual investors at a maximum rate of 28%.
"1997 Act long-term capital gains": securities sold by the Fund between May 7,
1997 and July 28, 1997 that were held for more than 12 months, and securities
sold by the Fund after July 28, 1997 that were held for more than 18 months.
These gains will be taxable to individual investors at a maximum rate of 20% for
investors in the 28% or higher federal income tax brackets, and at a maximum
rate of 10% for investors in the 15% federal income tax bracket.
"Qualified 5-year gains": For individuals in the 15% bracket, qualified 5-year
gains are net gains on securities held for more than 5 years which are sold
after December 31, 2000. For individuals who are subject to tax at higher rate
brackets, qualified 5-year gains are net gains on securities which are purchased
after December 31, 2000 and are held for more than 5 years. Taxpayers subject to
tax at the higher rate brackets may also make an election for shares held on
January 1, 2001 to recognize gain on their shares in order to qualify such
shares as qualified 5-year property. These gains will be taxable to individual
investors at a maximum rate of 18% for investors in the 28% or higher federal
income tax brackets, and at a maximum rate of 8% for investors in the 15%
federal income tax bracket.
3. CERTAIN DISTRIBUTIONS PAID IN JANUARY.
Distributions declared in December to shareholders of record in such month, and
paid to you in January of the following year, will be treated for tax purposes
as if they had been received by you on December 31 of the year in which they
were declared. Each Fund will report this income to you on your Form 1099-DIV
for the year in which these distributions were declared.
4. IMPACT OF CERTAIN SECURITIES AND TRANSACTIONS ON AVAILABLE DISTRIBUTIONS.
To the extent that the Underlying Funds invest in foreign securities, the gains
that they realize on changes in the foreign currency in which the investments
are made (foreign exchange gains) will be classified as ordinary income to the
Underlying Fund. When these gains are distributed to the Funds, and subsequently
are distributed to you, they will be taxable as ordinary income. Similarly,
foreign exchange losses realized by the Underlying Funds, including any such
losses realized on the sale of foreign debt securities, will generally be
treated as ordinary losses for federal income tax purposes. This treatment could
increase or reduce the Underlying Fund's income available for distribution to
the Fund, and, in turn, the Fund's distributions of ordinary income to you. This
may cause some or all of the Fund's previously distributed income to be
classified as a return of capital.
5. INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS.
Each Fund will inform you of the amount and character of your distributions at
the time they are paid, and will advise you of the tax status for federal income
tax purposes of such distributions shortly after the close of each calendar
year. Shareholders who have not held Fund shares for a full year may have
designated and distributed to them as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of their investment in the Fund.
TAXES
1. ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY.
As stated in the Prospectus, each Fund has elected and qualified to be treated
as a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of a Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable as ordinary dividends to the extent of the Fund's
available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, each
Fund must meet certain specific requirements, including:
o The Fund must maintain a diversified portfolio of securities, wherein, at the
close of each quarter of the taxable year, (i) not more than 25% of the value
of the Fund's total assets are invested in securities (other than U.S.
government securities and securities of other regulated investment companies)
of any one issuer, and (ii) at least 50% of the value of the Fund's total
assets are invested in cash, cash equivalents, U.S. government securities,
securities of other regulated investment companies, and other securities
which, with respect to a single issuer, do not exceed 5% of the value of the
Fund's total assets;
o The Fund must derive 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale of domestic or
foreign securities, and other income derived with respect to its business of
investing in such stock, securities or currencies;
o The Fund must realize less than 30% of its gross income for each fiscal year
from gains from the sale of securities and certain other assets that have
been held by the Fund for less than three months (this 30% (short-short)
gross income test is repealed for tax years beginning after August 5, 1997);
and
o The Fund must distribute to its shareholders at least 90% of its net
investment income for each of its fiscal years.
2. EXCISE TAX DISTRIBUTION REQUIREMENTS.
The Code requires each Fund to distribute at least 98% of its taxable ordinary
income earned during the calendar year and 98% of its capital gain net income
earned during the twelve-month period ending October 31 (in addition to amounts
from the prior year that were neither distributed nor taxed to the Fund) to you
by December 31 of each year in order to avoid federal excise taxes. The Fund
intends as a matter of policy to declare and pay sufficient dividends in
December or January (which are treated by you as received in December), but can
give no assurances that its distributions will be sufficient to eliminate all
such taxes.
3. REDEMPTION OF FUND SHARES.
Redemptions and exchanges of each Fund's shares are taxable transactions for
federal and state income tax purposes. You will recognize a gain or loss in an
amount equal to the difference between your tax basis and the amount you
received in exchange for your shares, subject to the rules described below. If
you hold your shares as a capital asset, the gain or loss that you realize will
be capital gain or loss, and will be long-term for federal income tax purposes
if you have held your shares for more than one year at the time of redemption or
exchange. Any loss incurred on the sale or exchange of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you with respect to your investment in
the Fund.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis on the new shares purchased.
4. DEFERRAL OF BASIS.
All or a portion of the sales charge that you paid for your shares in a Fund
will be excluded from your tax basis in any shares sold within 90 days of their
purchase (for the purpose of determining gain or loss upon the sale of such
shares) if you reinvest the sales proceeds in the Fund or in another fund in the
Franklin Templeton Group of Funds, and the sales charge that would otherwise
apply to your reinvestment is reduced or eliminated because of your reinvestment
with Franklin Templeton Funds. The portion of the sales charge excluded from
your tax basis in the shares sold will equal the amount that the sales charge is
reduced on your reinvestment. Any portion of the sales charge excluded from your
tax basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment in another Franklin Templeton Fund.
5. U.S. GOVERNMENT AND STATE OBLIGATIONS.
Because each of the Funds invests primarily in other regulated investment
companies, rather than in direct obligations of the U.S. government or in U.S.
territorial obligations, the Funds do not expect to pay dividends to you which
will qualify for exemption from state income taxation. To the extent each Fund
invests in such obligations, it may qualify some of its distributions to you for
state tax-exempt treatment, subject in some states to minimum investment
requirements that must be met by the Fund. At the end of each calendar year,
each Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your state personal income tax return. You
should consult with your own tax advisor to determine the application of your
state and local laws to these distributions. Because the rules on exclusion of
this income are different for corporations, corporate shareholders should
consult with their corporate tax advisors about whether any of their
distributions may be exempt from corporate income or franchise taxes.
6. DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS.
As a corporate shareholder, you should note that a portion of the dividends paid
by a Fund may qualify for the corporate dividends-received deduction. The amount
so qualified depends upon the aggregate amount of dividends received by the
Underlying Funds from domestic (U.S.) corporations. Corporate shareholders will
be permitted in some circumstances to deduct these qualified dividends
designated by a Fund, thereby reducing the tax that a corporate shareholder
would otherwise be required to pay on such dividends. The amount that a Fund may
designate as eligible for the dividends-received deduction will be reduced or
eliminated if the shares on which the dividends were paid to an Underlying Fund
were debt-financed or held by the Underlying Fund for less than a 46-day period
during a 90-day period beginning 45 days before the ex-dividend date and ending
45 days after the ex-dividend date. Similarly, if a corporate shareholder's Fund
shares are debt-financed or held for less than a 46-day period during a 90-day
period beginning 45 days before the ex-dividend date and ending 45 days after
the ex-dividend date, then such corporate shareholder's dividends-received
deduction will be reduced or eliminated. Even if designated as dividends
eligible for the deduction, all dividends (including any deducted portion) must
be included in the computation of the corporation's alternative minimum taxable
income.
7. INVESTMENT IN COMPLEX SECURITIES.
An Underlying Fund's investment in options, futures contracts and forward
contracts, including transactions involving actual or deemed short sales or
foreign exchange gains or losses are subject to many complex and special tax
rules. Over-the-counter options on debt securities and equity options, including
options on stock and on narrow-based stock indexes, will be subject to tax under
Section 1234 of the Code, generally producing a long-term or short-term capital
gain or loss upon exercise, lapse, or closing out of the option or sale of the
underlying stock or security. Certain other options, futures and forward
contracts entered into by an Underlying Fund are generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each Section 1256 position held by an
Underlying Fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the Underlying Fund's fiscal year
(and on other dates as prescribed by the Code), and all gain or loss associated
with fiscal year transactions and mark-to-market positions at fiscal year-end
(except certain currency gain or loss covered by Section 988 of the Code) will
generally be treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. While it is unclear at this time, the Fund expects that
some or all of the 60% long-term capital gain portion will qualify as "1997 Act
long-term capital gain" (gain from securities held for more than 18 months) and
will be subject to tax to individual investors at a maximum rate of 20% for
investors in the 28% or higher federal income tax brackets, or at a maximum rate
of 10% for investors in the 15% federal income tax bracket. Even though
marked-to-market, gains and losses realized on certain foreign currency and
foreign security investments will generally be treated as ordinary income. The
effect of Section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into short-term
capital gains or short-term capital losses into long-term capital losses within
the Underlying Fund. The acceleration of income on Section 1256 positions may
require the Underlying Fund to accrue taxable income without the corresponding
receipt of cash. In order to generate cash to satisfy the distribution
requirements of the Code, the Underlying Fund may be required to dispose of
portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of the Underlying Fund shares.
The acceleration of income, and the conversion of long-term capital gains into
short-term capital gains, and short-term capital losses into long-term capital
losses within the Underlying Fund will have a direct impact on its distributions
to a Fund, and in this way may directly affect the amount, character and timing
of income distributed to you by a Fund.
When the Underlying Fund holds an option or contract which substantially
diminishes its risk of loss with respect to another position of the Underlying
Fund (as might occur in some hedging transactions), this combination of
positions could be treated as a "straddle" for tax purposes, possibly resulting
in deferral of losses, adjustments in the holding periods and conversion of
short-term capital losses into long-term capital losses. The Underlying Fund may
make certain tax elections for mixed straddles (i.e., straddles comprised of at
least one Section 1256 position and at least one non-Section 1256 position)
which may reduce or eliminate the operation of these straddle rules.
In order to retain its status as a regulated investment company, the Underlying
Fund must also meet the requirement that less than 30% of its annual gross
income be derived from the sale or other disposition of securities and certain
other investments held for less than three months (short-short gains). This
requirement may limit the Underlying Fund's ability to engage in options,
straddles, hedging transactions and forward or futures contracts. These
transactions are often consummated in less than three months, may require the
sale of portfolio securities held less than three months and may, as in the case
of short sales of portfolio securities, reduce the holding periods of certain
securities within the Underlying Fund, resulting in additional short-short
income for such Underlying Fund. Each Underlying Fund will monitor its
transactions in such options, straddles, hedging transactions, forward and
futures contracts and similar securities, and may make certain other tax
elections in order to ensure continued qualification as a regulated investment
company, and to mitigate the effect of the above rules. This 30% (short-short)
gross income test is repealed for taxable years beginning after August 5, 1997.
Distributions paid to the Fund by an Underlying Fund out of ordinary income and
short-term capital gains arising from the Underlying Fund's investments,
including investments in options, forwards, and futures contracts, will be
taxable to the Fund as ordinary income. This income will become part of the
Fund's net investment income, and, as such, will be available for distribution
to you as an ordinary income dividend.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Underlying Funds must recognize gain (but not loss) on any constructive sale of
an appreciated financial position in stock, a partnership interest or certain
debt instruments. Any Underlying Fund will generally be treated as making a
constructive sale when it: 1) enters into a short sale on the same property, 2)
enters into an offsetting notional principal contract, or 3) enters into a
futures or forward contract to deliver the same or substantially similar
property. Other transactions (including certain financial instruments called
collars) will be treated as constructive sales as provided in Treasury
regulations to be published. There are also certain exceptions that apply for
transactions that are closed before the end of the 30th day after the close of
the taxable year.
8. INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES.
Many of the Underlying Funds in which a Fund is authorized to invest may also
invest in foreign securities. Such investments, if made, will have the following
additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time an Underlying Fund accrues income
(including dividends) or other receivables, or accrues expenses or other
liabilities, and the time the Underlying Fund actually collects such receivables
or pays such liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on the disposition of debt securities denominated in a foreign
currency and on the disposition of certain options, futures, forward contracts,
and possibly other financial derivative contracts, gain or loss attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of its disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Underlying Fund's investment company taxable income, which, in turn, will affect
the amount of income to be distributed to you by the Fund.
If an Underlying Fund's Section 988 losses exceed the Underlying Fund's other
net investment income during a taxable year, the Underlying Fund generally will
not be able to make ordinary dividend distributions to the Funds for that year.
However, if distributions were made before the losses were realized, these
distributions will be recharacterized as return of capital distributions for
federal income tax purposes, rather than as ordinary dividend or capital gain
distributions. The receipt of a return of capital distribution by one or more of
the Funds may cause a portion of its distributions to you to be treated as a
return of capital. In that event, your tax basis in your Fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your Fund shares will be treated as capital
gain to you.
As stated above, at least 90% of each Underlying Fund's income for each taxable
year must consist of "qualifying income." Foreign currency gains derived by the
Underlying Fund in the course of its investment activities generally will
constitute qualifying income for purposes of this requirement. Similarly, such
gains generally will not constitute "short-short" gains as described above
unless such gains are deemed not to be directly related to the Underlying Fund's
principal business of investing in stocks, other securities, and related
options, futures and forward contracts. All Franklin Templeton Funds investing
in foreign securities intend to comply with the qualifying income and
short-short requirements, and, therefore, will monitor their foreign currency
gains and losses with a view to satisfying these tests.
Many Underlying Funds are also permitted to engage in certain interest rate and
foreign currency swaps. The federal income tax treatment of these investments is
unclear in certain respects. The interest income and foreign currency gains
realized on these investments, may, in some circumstances, result in the
realization of income not qualifying under the 90% income test, or may be deemed
to be derived from the disposition of securities held less than three months in
determining the Underlying Fund's compliance with the short-short test. To the
extent that an Underlying Fund invests in interest rate and currency swap
transactions, it will limit its investments to the extent necessary to comply
with the qualifying income and short-short requirements.
An Underlying Fund may also be subject to foreign withholding taxes on income
from certain of its foreign securities. Because 50% or more of the total assets
of each Fund at the end of its fiscal year will generally be invested in other
regulated investment companies rather than in securities of foreign
corporations, the Funds will generally not be allowed to elect to pass-through
to you your pro rata share of foreign taxes paid by the Underlying Funds.
Instead, the Fund will deduct its share of any foreign taxes paid in computing
its net investment income and the income distributed to you will be net of any
foreign taxes paid by the Underlying Funds.
9. INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES.
The Underlying Funds may also invest in shares of foreign corporations which may
be classified under the Code as Passive Foreign Investment Companies ("PFICs").
In general, a foreign corporation is classified as a PFIC if at least one-half
of its assets constitute investment-type assets or 75% or more of its gross
income is investment-type income.
If an Underlying Fund receives an "excess distribution" with respect to PFIC
stock, the Underlying Fund itself may be subject to a U.S. federal income tax on
a portion of the distribution, whether or not the corresponding income is
distributed by the Underlying Fund. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Underlying Fund held the PFIC shares. The Underlying Fund will be
subject to tax on the portion, if any, of an excess distribution that is
allocated to prior taxable years, and an interest factor will be added to the
tax, as if the tax had been payable in such prior taxable years. In this case,
neither the Fund nor you would be permitted to claim a credit on its or your tax
return for the tax paid by the Underlying Fund. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing the
Underlying Fund's distributions to the Funds that are treated as ordinary
dividends rather than long-term capital gain dividends.
The Underlying Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in many
circumstances, the Underlying Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current basis, regardless
of whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. In addition, for taxable years
beginning after December 31, 1997, the Underlying Funds may elect to
mark-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. Any gain from
this mark-to-market election is reported as ordinary income and losses are
allowable to the extent of previously recognized gains. If this election were
made, tax at the Underlying Fund level under the PFIC rules would generally be
eliminated. The Underlying Funds' intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Underlying Fund (if any), the amount of income or gains
distributed or deemed distributed by the Underlying Fund to the Funds, the
amount of income or gains distributed to you by a Fund, and the timing and
character of these distributions.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Underlying Fund acquires shares in that corporation.
While Franklin Templeton Funds will generally seek to avoid investing in PFIC
shares to avoid the tax consequences detailed above, there are no guarantees
that they will be able to do so, and all Franklin Templeton Funds reserve the
right to make such investments as a matter of their fundamental investment
policies.
10. CONVERSION TRANSACTIONS.
Gains realized by an Underlying Fund from transactions that are deemed to be
"conversion transactions" under the Code, and that would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that such
gain does not exceed an amount defined as the "applicable imputed income
amount." A conversion transaction is any transaction in which substantially all
of the Underlying Fund's expected return is attributable to the time value of
its net investment in such transaction, and any one of the following criteria
are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the
future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Underlying Fund on the basis
that it would have the economic characteristics of a loan but would be
taxed as capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs. Application of these
conversion transaction rules at the Underlying Fund level may have an effect on
the amount and character of income realized by one or more of the Funds, and
distributed to you.
11. STRIPPED PREFERRED STOCK.
Occasionally, an Underlying Fund may purchase "stripped preferred stock" that is
subject to special tax treatment. Stripped preferred stock is defined as certain
preferred stock issues where ownership of the stock has been separated from the
right to receive dividends that have not yet become payable. The stock must have
a fixed redemption price, must not participate substantially in the growth of
the issuer, and must be limited and preferred as to dividends. The difference
between the redemption price and purchase price is taken into the Underlying
Fund's income over the term of the instrument as if it were original issue
discount. The amount that must be included in each period generally depends on
the original yield to maturity, adjusted for any prepayments of principal.
Application of these rules at the Underlying Fund level may have an effect on
the amount and timing of income realized by one or more of the Funds, and
distributed to you.
12. ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) TRANSACTIONS.
Any Underlying Fund's investments in zero coupon bonds, bonds issued or acquired
at a discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause it to recognize income prior to its receipt of
cash payments. Zero coupon and delayed interest bonds are normally issued at a
discount and are therefore generally subject to tax reporting as original issue
discount ("OID") obligations. The Underlying Fund is required to accrue as
income a portion of the discount at which these securities were issued, and to
distribute such income each year (as ordinary dividends) in order to maintain
its qualification as a regulated investment company and to avoid income and
excise taxes at the Underlying Fund level. PIK bonds are subject to similar tax
rules concerning the amount, character and timing of income required to be
accrued by the Underlying Fund. Bonds acquired in the secondary market for a
price less than their stated redemption price at maturity (or revised issue
price in the case of a bond having OID) are said to have been acquired with
market discount. For these bonds, the Underlying Fund may elect to accrue market
discount on a current basis, in which case the Underlying Fund will be required
to distribute any such accrued discount. If the Underlying Fund does not elect
to accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation. Application of these rules at the
Underlying Fund level may have an effect on the amount and timing of income
realized by one or more of the Funds and distributed to you.
13. DEFAULTED OBLIGATIONS.
An Underlying Fund may be required to accrue income on defaulted obligations and
to distribute such income to one or more of the Funds even though it is not
currently receiving interest or principal payments on such obligations. In order
to generate cash to satisfy these distribution requirements, the Underlying Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
the Underlying Funds' shares.
For more information about the taxation of either the Underlying Funds' or the
Funds' investments, or of the Fund's distributions to you, please contact your
personal tax advisor.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering 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 table below shows the aggregate underwriting commissions received by
Distributors in connection with the offering of the Fund's shares, the net
underwriting discounts and commissions retained by Distributors after allowances
to dealers, and the amounts received by Distributors in connection with
redemptions or repurchases of shares for the fiscal year ended July 31, 1997.
AGGREGATE AMOUNT
UNDERWRITING UNDERWRITING RECEIVED BY
COMMISSIONS COMMISSIONS DISTRIBUTORS FROM
RECEIVED BY RETAINED BY REDEMPTIONS
FUND DISTRIBUTORS DISTRIBUTORSOR REPURCHASES
- --------------------------------------------------------------------------------
Conservative Target Fund..... $ 51,508 $2,301 $1,164
Moderate Target Fund......... 100,721 6,491 2,377
Growth Target Fund........... 127,175 9,421 500
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
investment advisory and asset allocation agreement with Advisers, or by vote of
a majority of the outstanding shares of the class. Distributors or any dealer or
other firm may also terminate their respective distribution or service agreement
at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended July 31, 1997, Distributors' eligible expenditures for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to each Fund's Class I and Class II plans and the amounts the Fund paid
Distributors under the plans were as follows:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID
FUND EXPENSES BY FUND
- ----------------------------------------------------------
Conservative Target
Fund - Class I .............. $ 1,083 $ 489
Conservative Target
Fund - Class II ............. 27,915 6,884
Moderate Target
Fund - Class I .............. 19,607 8,467
Moderate Target
Fund - Class II ............. 40,176 8,790
Growth Target
Fund - Class I .............. 5,986 2,431
Growth Target
Fund - Class II ............. 44,398 8,607
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
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 each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for the period from
inception (December 31, 1996) to July 31, 1997, was as follows:
FUND CLASS I CLASS II
- -------------------------------------------------------------------
Conservative Target Fund ................. 4.30% 6.41%
Moderate Target Fund ..................... 7.98% 9.75%
Growth Target Fund ....................... 8.21% 10.89%
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. The yield for each class for the 30-day period
ended July 31, 1997, was as follows:
FUND CLASS I CLASS II
- -------------------------------------------------------------------
Conservative Target Fund ................. 4.18% 3.46%
Moderate Target Fund ..................... 1.63% 1.19%
Growth Target Fund ....................... 1.86% 1.21%
These figures were 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.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and dividing that
amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include distributions
to shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gains and is calculated over a
different period of time.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones(R) Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, AND 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 CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's 100(R) Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock Index
is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
o) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate and mortgage bonds.
p) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
q) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
r) SB World Government Bond Index or its components indices:
o 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:
o Measures price, yield and total return of Mortgage-backed securities.
t) SB World Money Market Index:
o 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 40-Bond Index - an index of municipal bond yields based upon
yields of 40 revenue bonds maturing in 30 years.
dd) 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.
ee) 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 the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, 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 49 years and
now services more than 2.8 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $223 billion in assets under
management for more than 5.7 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of November 3, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
- ------------------------------------------------------------------------
Conservative Target Fund - Class I
Jane B. Emons and
Jeffrey Brandfon Trustees
The Brandfon Motors
401k Pension Plan
Dated 10/17/94
215 Whalley Avenue
New Haven CT 06511.................. 57,965.675 18.1%
Franklin Templeton
Trust Company
Trustee for ValuSelect
Alburger Basso De Grosz Inc.
Attention: Trading
P.O. Box 2438
Rancho Cordova CA
95741-2438.......................... 17,601.869 5.5%
Franklin Templeton
Trust Company
Trustee for ValuSelect
Trialco, Inc.
Attention: Trading
P.O. Box 2438
Rancho Cordova CA
95741-2438.......................... 46,049.609 14.4%
Margie Gobler
Treasurer, Trustee
Waterford Foundation
FBO Public Education
2306 Airport Road
Waterford, MI
48327-1209.......................... 18,919.522 5.9%
Conservative Target Fund - Class II
Dean Witter Reynolds
Custodian for
Frank S. Sikora IRA Standard
Dated 10/20/97
Church Street Station
P. O. Box 250
New York NY
10277-1763.......................... 50,679.011 12.3%
Moderate Target Fund - Class I
Franklin Templeton
Trust Company Trustee
for ValuSelect
Bederson & Co.
Attention: Trading
P.O. Box 2438
Rancho Cordova CA
95741-2438.......................... 42,459.045 5.3%
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
- ---------------------------------------------------------------------------
Kenneth M. Snider, Trustee
KMS Financial Services Inc.
Pension Plan
2200 Sixth Avenue,
Suite 1125
Seattle WA 98121.................... 87,039.333 10.8%
Franklin Templeton
Trust Company Trustee
for ValuSelect
Opra Incorporated
Attention: Trading
P.O. Box 2438
Rancho Cordova CA
95741-2438.......................... 110,936.261 13.8%
Growth Target Fund - Class I
Kenneth M. Snider, Trustee
KMS Financial Services Inc.
Pension Plan
2200 Sixth Avenue,
Suite 1125
Seattle WA 98121.................... 77,115.870 6.6%
Franklin Templeton
Trust Company Trustee
for ValuSelect
Opra Incorporated
Attention: Trading
P.O. Box 2438
Rancho Cordova CA
95741-2438.......................... 213,243.823 18.2%
Franklin Templeton
Trust Company Trustee
for ValuSelect
Alburger Basso De Grosz Inc.
Attention: Trading
P.O. Box 2438
Rancho Cordova CA
95741-2438.......................... 201,682.330 17.2%
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended July 31, 1997, including the auditors'
report, are incorporated herein by reference.
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
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Funds dated December 1, 1997, 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 that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
FAS SAI 12/97
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
File Nos. 811-7851 &
333-13601
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders for fiscal year ended July 31,
1997 as filed electronically with the Securities and Exchange Commission
on Form Type N-30D on October 10, 1997.
(i) Report of Independent Auditors
(ii) Statement of Investments in Securities and Net Assets - July 31,
1997
(iii)Statements of Assets and Liabilities dated July 31, 1997
(iv) Statements of Operations - for the period ended December 31, 1996
(effective date) to July 31, 1997
(v) Statements of Changes in Net Assets - for the period ended December
31, 1996 (effective date) to July 31, 1997
(vi) Notes to Financial Statements
(b) Exhibits:
The following exhibits are incorporated herein by reference, except
exhibit 11(i), 27(i), 27(ii), 27(iii), 27(iv), 27(v) and 27(vi), which are
attached.
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust of Franklin Templeton
Fund Manager dated September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(ii) Certificate of Amendment of Agreement and Declaration of
Trust of Franklin Templeton Fund Manager dated September
17, 1996
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(iii) Certificate of Trust dated September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(iv) Certificate of Amendment to the Certificate of Trust of
Franklin Templeton Fund Manager dated September 17, 1996
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Investment Advisory and Asset Allocation Agreement between
Registrant and Franklin Advisers, Inc., dated November 19,
1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc., dated November 19,
1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc., and Securities Dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: June 30, 1997
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
(i) Administration Agreement between Registrant and Franklin
Templeton Services, Inc., dated November 19, 1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Subscription Agreement between Registrant and Franklin
Resources, Inc., dated December 19, 1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Copy of Model Retirement Plan
Registrant: Franklin High Income Trust
Filing: Post-effective Amendment No. 26 to
Registration Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Class I Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc., dated
December 31, 1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(ii) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc., dated
December 31, 1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not be
audited)
(i) Schedule for Computation of Performance Quotation
Registrant: Franklin Tax-Advantaged U.S. Government
Securities Fund
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-11963
Filing Date: March 1, 1995
(17) Powers of Attorney
(i) Power of Attorney dated May 29, 1997
Filing: Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: June 30, 1997
(ii) Certificate of Secretary dated May 29, 1997
Filing: Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: June 30, 1997
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act
(i) Multiple Class Plan dated November 19, 1996
Filing: Pre-Effective Amendment No. 2 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(27) Financial Data Schedule Computation
(i) Financial Data Schedule for Franklin Templeton Conservative
Target Fund - Class I
(ii) Financial Data Schedule for Franklin Templeton Conservative
Target Fund - Class II
(iii) Financial Data Schedule for Franklin Templeton Moderate
Target Fund - Class I
(iv) Financial Data Schedule for Franklin Templeton Moderate
Target Fund - Class II
(v) Financial Data Schedule for Franklin Templeton Growth
Target Fund - Class I
(vi) Financial Data Schedule for Franklin Templeton Growth
Target Fund - Class II
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
Not Applicable
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of September 14, 1997 the number of record holders of the only classes of
securities of the Registrant was as follows:
NUMBER OF RECORD HOLDERS
ADVISOR
Shares of Beneficial Interest CLASS I CLASS II CLASS
Franklin Templeton Conservative Target Fund 189 172 N/A
Franklin Templeton Moderate Target Fund 351 478 N/A
Franklin Templeton Growth Target Fund 819 661 N/A
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, 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 trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Please see the Declaration of Trust, By-Laws, Management, and Distribution
Agreements, previously filed as exhibits and incorporated herein by reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said By-Laws shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
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 investment manager's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. 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:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
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 Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Annuity Fund
Templeton Variable Products Series Fund
(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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 26th day
of November, 1997.
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* Principal Executive Officer
Donald P. Gould Dated: November 26, 1997
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: November 26, 1997
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: November 26, 1997
Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: November 26, 1997
Harris J. Ashton* Trustee
Harris J. Ashton Dated: November 26, 1997
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: November 26, 1997
Charles B. Johnson* Trustee
Charles B. Johnson Dated: November 26, 1997
Rupert H. Johnson, Jr.* Trustee
Rupert H. Johnson, Jr. Dated: November 26, 1997
Frank W.T. LaHaye* Trustee
Frank W.T. LaHaye Dated: November 26, 1997
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: November 26, 1997
*By: /s/Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Agreement and Declaration of Trust of Franklin *
Templeton Fund Manager dated September 18, 1995
EX-99.B1(ii) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin Templeton Fund
Manager dated September 17, 1996
EX-99.B1(iii) Certificate of Trust dated September 18, 1995 *
EX-99.B1(iv) Certificate of Amendment to the Certificate of *
Trust of Franklin Templeton Fund Manager dated
September 17, 1996
EX-99.B2(i) By-Laws *
EX-99.B5(i) Investment Advisory and Asset Allocation *
Agreement between Registrant and Franklin
Advisers, Inc., dated November 19, 1996
EX-99.B6(i) Distribution Agreement between Registrant and *
Franklin/Templeton Distributors, Inc., dated
November 19, 1996
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc., and
Securities Dealers
EX-99.B8(i) Master Custody Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.B8(ii) Terminal Link Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.B9(i) Administration Agreement between Registrant and *
Franklin Templeton Services, Inc., dated
November 19, 1996
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Subscription Agreement between Registrant and *
Franklin Resources, Inc., dated December 19, 1996
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Class I Distribution Plan pursuant to Rule 12b-1 *
between Registrant and Franklin/Templeton Distributors,
Inc., dated December 31, 1996
EX-99.B15(ii) Class II Distribution Plan pursuant to Rule *
12b-1 between Registrant and Franklin/Templeton
Distributors, Inc., dated December 31, 1996
EX-99.B16(i) Schedule for Computation of Performance Quotation *
EX-99.B17(i) Power of Attorney dated May 29, 1997 *
EX-99.B17(ii) Certificate of Secretary dated May 29, 1997 *
EX-99.B18(i) Multiple Class Plan dated November 19, 1996 *
EX-27.B(i) Financial Data Schedule for Franklin Templeton Attached
Conservative Target Fund - Class I
EX-27.B(ii) Financial Data Schedule for Franklin Templeton Attached
Conservative Target Fund - Class II
EX-27.B(iii) Financial Data Schedule for Franklin Templeton Attached
Moderate Target Fund - Class I
EX-27.B(iv) Financial Data Schedule for Franklin Templeton Attached
Moderate Target Fund - Class II
EX-27.B(v) Financial Data Schedule for Franklin Templeton Attached
Growth Target Fund - Class I
EX-27.B(vi) Financial Data Schedule for Franklin Templeton Attached
Growth Target Fund - Class II
* Incorporated by Reference
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Post-Effective Amendment No. 2 to the
Registration Statement of Franklin Templeton Fund Allocator Series on Form N-1A
(File No. 333-13601) of our report dated September 11, 1997 on our audit of the
financial statements and financial highlights of Franklin Templeton Fund
Allocator Series, which report is included in the Annual Report to Shareholders
for the year ended July 31, 1997, which is incorporated by reference in the
Registration Statement.
/s/Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
San Francisco, California
November 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1997 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<NUMBER> 011
<NAME> FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND - CLASS I
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<PERIOD-START> DEC-31-1996
<PERIOD-END> JUL-31-1997
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<INVESTMENTS-AT-VALUE> 4,668,950
<RECEIVABLES> 41,520
<ASSETS-OTHER> 79,182
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<TOTAL-ASSETS> 4,789,652
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<TOTAL-LIABILITIES> 170,821
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<ACCUM-APPREC-OR-DEPREC> 210,034
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<DIVIDEND-INCOME> 45,999
<INTEREST-INCOME> 576
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<APPREC-INCREASE-CURRENT> 210,034
<NET-CHANGE-FROM-OPS> 245,727
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,504)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 149,156
<NUMBER-OF-SHARES-REDEEMED> (1,344)
<SHARES-REINVESTED> 237
<NET-CHANGE-IN-ASSETS> 4,578,831
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 43,758
<AVERAGE-NET-ASSETS> 1,765,714
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.120
<PER-SHARE-GAIN-APPREC> 0.800
<PER-SHARE-DIVIDEND> (0.050)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.870
<EXPENSE-RATIO> 0.590
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1997 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND - CLASS II
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<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 4,458,916
<INVESTMENTS-AT-VALUE> 4,668,950
<RECEIVABLES> 41,520
<ASSETS-OTHER> 79,182
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,789,652
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 170,821
<TOTAL-LIABILITIES> 170,821
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,378,271
<SHARES-COMMON-STOCK> 278,499
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 29,104
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,422
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 210,034
<NET-ASSETS> 4,618,831
<DIVIDEND-INCOME> 45,999
<INTEREST-INCOME> 576
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<EXPENSES-NET> (12,304)
<NET-INVESTMENT-INCOME> 34,271
<REALIZED-GAINS-CURRENT> 1,422
<APPREC-INCREASE-CURRENT> 210,034
<NET-CHANGE-FROM-OPS> 245,727
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,663)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 292,216
<NUMBER-OF-SHARES-REDEEMED> (13,971)
<SHARES-REINVESTED> 254
<NET-CHANGE-IN-ASSETS> 4,578,831
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,583
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 43,758
<AVERAGE-NET-ASSETS> 1,765,714
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.100
<PER-SHARE-GAIN-APPREC> 0.750
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<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.810
<EXPENSE-RATIO> 1.480
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN TEMPLETON MODERATE TARGET FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 10,459,620
<INVESTMENTS-AT-VALUE> 11,105,030
<RECEIVABLES> 76,023
<ASSETS-OTHER> 146,850
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,327,903
<PAYABLE-FOR-SECURITIES> 15,998
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 118,951
<TOTAL-LIABILITIES> 134,949
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,846,944
<SHARES-COMMON-STOCK> 577,198
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 92,415
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 608,185
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 645,410
<NET-ASSETS> 11,192,954
<DIVIDEND-INCOME> 173,723
<INTEREST-INCOME> 11,424
<OTHER-INCOME> 0
<EXPENSES-NET> (44,336)
<NET-INVESTMENT-INCOME> 140,811
<REALIZED-GAINS-CURRENT> 608,185
<APPREC-INCREASE-CURRENT> 645,410
<NET-CHANGE-FROM-OPS> 1,394,406
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (44,458)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,287,701
<NUMBER-OF-SHARES-REDEEMED> (1,714,714)
<SHARES-REINVESTED> 4,211
<NET-CHANGE-IN-ASSETS> 11,152,954
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,870
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 76,930
<AVERAGE-NET-ASSETS> 9,432,500
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .170
<PER-SHARE-GAIN-APPREC> 1.130
<PER-SHARE-DIVIDEND> (.040)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.260
<EXPENSE-RATIO> .670
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1997 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN TEMPLETON MODERATE TARGET FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 10,459,620
<INVESTMENTS-AT-VALUE> 11,105,030
<RECEIVABLES> 76,023
<ASSETS-OTHER> 146,850
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,327,903
<PAYABLE-FOR-SECURITIES> 15,998
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 118,951
<TOTAL-LIABILITIES> 134,949
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,846,944
<SHARES-COMMON-STOCK> 420,721
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 92,415
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 608,185
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 645,410
<NET-ASSETS> 11,192,954
<DIVIDEND-INCOME> 173,723
<INTEREST-INCOME> 11,424
<OTHER-INCOME> 0
<EXPENSES-NET> (44,336)
<NET-INVESTMENT-INCOME> 140,811
<REALIZED-GAINS-CURRENT> 608,185
<APPREC-INCREASE-CURRENT> 645,410
<NET-CHANGE-FROM-OPS> 1,394,406
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,938)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 447,681
<NUMBER-OF-SHARES-REDEEMED> (27,329)
<SHARES-REINVESTED> 369
<NET-CHANGE-IN-ASSETS> 11,152,954
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,870
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 76,930
<AVERAGE-NET-ASSETS> 9,432,500
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> .070
<PER-SHARE-GAIN-APPREC> 1.110
<PER-SHARE-DIVIDEND> (.020)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 11.160
<EXPENSE-RATIO> 1.500
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1997 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN TEMPLETON GROWTH TARGET FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 13,534,178
<INVESTMENTS-AT-VALUE> 14,304,391
<RECEIVABLES> 136,881
<ASSETS-OTHER> 87,959
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,529,231
<PAYABLE-FOR-SECURITIES> 50,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 108,807
<TOTAL-LIABILITIES> 158,807
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,555,242
<SHARES-COMMON-STOCK> 850,786
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 55,207
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,238)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 770,213
<NET-ASSETS> 14,370,424
<DIVIDEND-INCOME> 76,690
<INTEREST-INCOME> 1,895
<OTHER-INCOME> 0
<EXPENSES-NET> (23,378)
<NET-INVESTMENT-INCOME> 55,207
<REALIZED-GAINS-CURRENT> (10,238)
<APPREC-INCREASE-CURRENT> 770,213
<NET-CHANGE-FROM-OPS> 815,182
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,059,498
<NUMBER-OF-SHARES-REDEEMED> (208,712)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14,330,424
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,826
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 57,477
<AVERAGE-NET-ASSETS> 3,991,350
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 1.280
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.33
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1997 ANNUAL REPORT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> FRANKLIN TEMPLETON GROWTH TARGET FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 13,534,178
<INVESTMENTS-AT-VALUE> 14,304,391
<RECEIVABLES> 136,881
<ASSETS-OTHER> 87,959
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,529,231
<PAYABLE-FOR-SECURITIES> 50,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 108,807
<TOTAL-LIABILITIES> 158,807
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,555,242
<SHARES-COMMON-STOCK> 418,893
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 55,207
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,238)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 770,213
<NET-ASSETS> 14,370,424
<DIVIDEND-INCOME> 76,690
<INTEREST-INCOME> 1,895
<OTHER-INCOME> 0
<EXPENSES-NET> (23,378)
<NET-INVESTMENT-INCOME> 55,207
<REALIZED-GAINS-CURRENT> (10,238)
<APPREC-INCREASE-CURRENT> 770,213
<NET-CHANGE-FROM-OPS> 815,182
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 426,731
<NUMBER-OF-SHARES-REDEEMED> (7,838)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 14,330,424
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,826
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 57,477
<AVERAGE-NET-ASSETS> 3,991,350
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.040
<PER-SHARE-GAIN-APPREC> 1.260
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.300
<EXPENSE-RATIO> 1.480
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
</TABLE>
