As filed with the Securities and Exchange Commission on September 21, 1998
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. 3 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5 (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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on December 1, 1998 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Shares of Beneficial Interest of:
Franklin Templeton Conservative Target Fund - Class I
Franklin Templeton Conservative Target Fund - Class II
Franklin Templeton Moderate Target Fund - Class I
Franklin Templeton Moderate Target Fund - Class II
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"
Information
4. General Description of "How Is the Trust Organized?"; "How
Registrant Do the Funds Invest Their Assets?";
What Are the Risks of Investing in
the Funds?"; "What Are the Risks of
Investing in the Underlying Franklin
Templeton Funds?"; "How Do the
Underlying Franklin Templeton Funds
Invest Their Assets?"; "What Are
some of the Other Investment
Policies, Strategies and Risks of
the Underlying Franklin Templeton
Funds?"
5. Management of the Fund "Who Manages the Funds?"
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 Funds?"; "How Taxation Affects
the Funds and Their Shareholders";
"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
Funds?"; "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 Do Funds Invest Their Assets?";
Policies "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
Funds' Underwriter"
17. Brokerage Allocation "How Do the Funds Buy Securities For
their Portfolios?"
18. Capital Stock and Other Not Applicable
Securities
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 Do the Funds Measure
Data Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
FRANKLIN TEMPLETON MODERATE TARGET FUND
FRANKLIN TEMPLETON GROWTH TARGET FUND
DECEMBER 1, 1998
INVESTMENT STRATEGY GROWTH & INCOME
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how each fund invests
and the services available to shareholders.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated December 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
December 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUNDS
Expense Summary..........................................
Financial Highlights.....................................
How Do the Funds Invest Their Assets?....................
What Are the Risks of Investing in the Funds?............
What Are the Risks of Investing in the Underlying
Franklin Templeton Funds?...............................
How Do the Underlying Franklin Templeton
Funds Invest Their Assets?..............................
Who Manages the Funds?...................................
How Taxation Affects the Funds and Their
Shareholders.............................................
How Is the Trust Organized?..............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Funds?.......
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
APPENDICES
What Are Some of the Other Investment
Policies, Strategies and Risks of
the Underlying Franklin Templeton Funds?................
Description of Ratings...................................
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a
fund. It is based on the historical expenses of each fund for the fiscal year
ended July 31, 1998. Each 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)++ .......... 5.75% 5.75% 5.75%
Paid at time of redemption++++ ................. None None None
Exchange Fee (per transaction)* ................ None None None
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)* ................ None None None
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Asset Allocation Fees** ........................ 0.25% 0.25% 0.25%
Rule 12b-1 Fees*** ............................. 0.25% 0.25% 0.25%
Other Expenses** ............................... 0.56% 0.42% 0.48%
Management Fees of the Underlying Franklin
Templeton Funds .............................. 0.54% 0.58% 0.61%
Other Expenses of the Underlying Franklin
Templeton Funds .............................. 0.16% 0.20% 0.22%
-----------------------------
Total Fund Operating Expenses** ................ 1.76% 1.70% 1.81%
=============================
CLASS II
Asset Allocation Fees** ........................ 0.25% 0.25% 0.25%
Rule 12b-1 Fees*** ............................. 1.00% 1.00% 1.00%
Other Expenses** ............................... 0.56% 0.42% 0.48%
Management Fees of the Underlying Franklin
Templeton Funds .............................. 0.54% 0.58% 0.61%
Other Expenses of the Underlying Franklin
Templeton Funds .............................. 0.16% 0.20% 0.22%
-----------------------------
Total Fund Operating Expenses** ................ 2.51% 2.45% 2.56%
=============================
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 a fund.
` 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------
YEARS
Conservative Target Fund - Class I $74**** $110 $147 $253
Conservative Fund - Class II $45 $ 87 $142 $292
Moderate Target Fund - Class I $74**** $108 $144 $247
Moderate Target Fund - Class II $44 $ 86 $139 $286
Growth Target Fund - Class I $75**** $111 $150 $258
Growth Target Fund - Class II $45 $89 $145 $297
For the same Class II investment, you would pay projected expenses of $35
(Conservative Target Fund), $35 (Moderate Target Fund), and $36 (Growth
Target Fund) if you did not sell your shares at the end of the first year.
Your projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Each 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.
+++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."
++++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 you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
*There is a $5.00 fee for exchanges by Market Timers.
**For the period shown, the manager had agreed in advance to limit its asset
allocation fees and to assume as its own expense certain expenses otherwise
payable by each fund. With this reduction, asset allocation fees were 0.08%
for the Moderate Target Fund and 0.02% for the Growth Target Fund. The
Conservative Target Fund paid no asset allocation fees. Total direct
operating expenses were .75% for Class I and 1.50% for Class II of each fund.
The funds also indirectly bear their pro rata share of the expenses of the
underlying Franklin Templeton funds.
***These fees may not exceed 0.25% for Class I and 1.00% for Class II. 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 rules of the National
Association of Securities Dealers, Inc. For the Conservative Target Fund -
Class I and the Moderate Target Fund - Class I the total fund operating
expenses are different than the ratio of expenses to average net assets shown
under "Financial Highlights" due to a timing difference between the end of
the 12b-1 plan year and the fund's fiscal year end.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes each fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the funds' independent auditor. The
audit report covering the periods shown below appears in the Trust's Annual
Report to Shareholders for the fiscal year ended July 31, 1998. The Annual
Report to Shareholders also includes more information about each fund's
performance. For a free copy, please call Fund Information.
CONSERVATIVE TARGET FUND - CLASS I
YEAR ENDED JULY 31, 1998 1997***
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.87 $10.00
------------------------
Income from investment operations:
Net investment income .39 .12
Net realized and unrealized gains .18 .80
------------------------
Total from investment operations .57 .92
Less distributions from:
Net investment income (.38) (.05)
Net realized gains (.06) --
------------------------
Total distributions (.44) (.05)
------------------------
Net asset value, end of year $11.00 $10.87
========================
Total return* 5.41% 9.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of Year (000's) $11,637 $1,609
Ratios to average net assets:
Expenses .76% .59%**
Expenses excluding waiver and
payments by affiliate 1.07% 3.64%**
Net investment income 3.88% 3.93%**
Portfolio turnover rate 141.96% 33.30%
CONSERVATIVE TARGET FUND - CLASS II
YEAR ENDED JULY 31, 1998 1997***
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.81 $10.00
------------------------
Income from investment operations:
Net investment income .33 .10
Net realized and unrealized gains .15 .75
------------------------
Total from investment operations .48 .85
------------------------
Less distributions from:
Net investment income (.31) (.04)
Net realized gains (.06) --
------------------------
Total distributions (.37) (.04)
------------------------
Net asset value, end of year $10.92 $10.81
========================
Total return* 4.56% 8.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $10,218 $3,010
Ratios to average net assets:
Expenses 1.50% 1.48%**
Expenses excluding waiver and
payments by affiliate 1.81% 4.53%**
Net investment income 3.27% 3.04%**
Portfolio turnover rate 141.96% 33.30%
MODERATE TARGET FUND - CLASS I
YEAR ENDED JULY 31, 1998**** 1997***
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.26 $10.00
------------------------
Income from investment operations:
Net investment income .37 .17
Net realized and unrealized gains .01 1.13
------------------------
Total from investment operations .38 1.30
------------------------
Less distributions from:
Net investment income (.38) (.04)
Net realized gains (.49) --
------------------------
Total distributions (.87) (.04)
------------------------
Net asset value, end of year $10.77 $11.26
========================
Total return* 3.71% 13.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $23,028 $6,498
Ratios to average net assets:
Expenses .77% .67%**
Expenses excluding waiver and
payments by affiliate .94% 1.26%**
Net investment income 3.37% 2.69%**
Portfolio turnover rate 124.87% 264.78%
MODERATE TARGET FUND - CLASS II
YEAR ENDED JULY 31, 1998**** 1997***
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.16 $10.00
------------------------
Income from investment operations:
Net investment income .30 .07
Net realized and unrealized gains -- 1.11
------------------------
Total from investment operations .30 1.18
------------------------
Less distributions from:
Net investment income (.32) (.02)
------------------------
Net realized gains (.49) --
------------------------
Total distributions (.81) (.02)
------------------------
Net asset value, end of year $10.65 $11.16
========================
Total return* 2.98% 11.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $19,501 $4,695
Ratios to average net assets:
Expenses 1.50% 1.50%**
Expenses excluding waiver and
payments by affiliate 1.68% 2.09%**
Net investment income 2.75% 1.86%**
Portfolio turnover rate 124.87% 264.78%
GROWTH TARGET FUND - CLASS I
YEAR ENDED JULY 31, 1998 1997***
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.33 $10.00
------------------------
Income from investment operations:
Net investment income .33 .05
Net realized and unrealized gains (losses) (.05) 1.28
------------------------
Total from investment operations .28 1.33
------------------------
Less distributions from:
Net investment income (.30) --
Net realized gains (.15) --
------------------------
Total distributions (.45) --
------------------------
Net asset value, end of year $11.16 $11.33
========================
Total return* 2.63% 13.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $27,042 $9,638
Ratios to average net assets:
Expenses .75% .73%**
Expenses excluding waiver and
payments by affiliate .98% 2.19%**
Net investment income 2.80% 2.65%**
Portfolio turnover rate 118.19% 65.52%
GROWTH TARGET FUND - CLASS II
YEAR ENDED JULY 31, 1998 1997***
- ----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.30 $10.00
------------------------
Income from investment operations:
Net investment income .24 .04
Net realized and unrealized gains (losses) (.05) 1.26
------------------------
Total from investment operations .19 1.30
------------------------
Less distributions from:
Net investment income (.26) --
Net realized gains (.15) --
------------------------
Total distributions (.41) --
------------------------
Net asset value, end of year $11.08 $11.30
========================
Total return* 1.84% 13.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $20,752 $4,733
Ratios to average net assets:
Expenses 1.50% 1.49%**
Expenses excluding waiver and
payments by affiliate 1.73% 2.95%**
Net investment income 1.97% 1.89%**
Portfolio turnover rate 118.19% 65.52%
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized.
**Annualized.
***For the period December 31, 1996 (effective date) to July 31, 1997.
****Per share amounts have been calculated using the daily average shares
outstanding during the period.
HOW DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS
The investment goal of each fund is the highest level of long-term total
return that is consistent with an acceptable level of risk. The goal is
fundamental, which means that it may not be changed without shareholder
approval.
WHAT ARE THE FUNDS' INVESTMENT STRATEGIES?
Each fund pursues its investment goal through active asset allocation by
investing primarily in a combination of Franklin Templeton funds (underlying
Franklin Templeton funds). These funds, in turn, invest in a variety of U.S.
and foreign equity, fixed-income (investment grade or high yield), natural
resources and money market securities. Each fund is designed to be a
long-term investment and has a different level of risk and return. The
following descriptions 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 be most appropriate for investors with a shorter-term investment
horizon.
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 be most appropriate for investors with an intermediate-term
investment horizon.
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 be most appropriate for investors with a longer-term investment
horizon.
The funds offer investors the following potential benefits:
Convenient, efficient access to a broadly diversified portfolio of
Franklin Templeton funds, in a single investment.
Disciplined asset allocation, implemented and reviewed by professional
portfolio managers.
A choice of three funds offering a range of risk/return levels,
enabling the investor to select the fund (or combination of funds) that
most closely matches the investor's risk/return preferences.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each fund invests in different combinations of underlying Franklin Templeton
funds based on the fund's different risk/return level. The fund's investment
manager determines the asset allocation for each fund and implements the
allocation by investing in a combination of underlying Franklin Templeton
funds. The manager evaluates the risk level of the underlying Franklin
Templeton funds by looking at such factors as volatility (the variability of
returns from one period to the next) and "downside" risk (the likelihood of
the return in a particular period being below a specified level).
The underlying Franklin Templeton funds are listed below, grouped under broad
asset classes. Please remember that the headings are provided for convenience
only and that the investment policies of these funds may permit them to
invest in securities other than those suggested by a particular heading. The
list of funds may change from time to time upon the recommendation of the
manager without shareholder approval. For more detailed information on the
investment policies of each underlying Franklin Templeton fund, see "How Do
the Underlying Franklin Templeton Funds Invest Their Assets?" in this
prospectus.
U.S. EQUITY FUNDS
Franklin Equity Fund
Franklin Growth Fund
Franklin Real Estate Securities Fund
Franklin Small Cap Growth Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Discovery Fund
Mutual Shares Fund
U.S. FIXED-INCOME FUNDS
Franklin Bond Fund
Franklin Investment Grade Income Fund
Franklin's AGE High Income Fund
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin U.S. Government Securities Fund
INTERNATIONAL EQUITY FUNDS
Mutual European Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Global Smaller Companies Fund
Templeton Greater European Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
INTERNATIONAL FIXED-INCOME FUNDS
Franklin Global Government Income Fund
Franklin Templeton Hard Currency Fund
Templeton Global Bond Fund
NATURAL RESOURCES FUNDS
Franklin Gold Fund
Franklin Natural Resources Fund
Generally, Growth Target Fund will hold a higher percentage of its assets in
underlying Franklin Templeton funds investing primarily in U.S. and foreign
equity securities and natural resources securities than will Moderate Target
Fund, which in turn will hold a higher percentage of its assets in such funds
than will Conservative Target Fund. Conservative Target Fund generally will
hold a higher percentage of its assets in underlying Franklin Templeton 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 funds
than will Growth Target Fund. The percentage ranges targeted for each fund by
broad asset class are set forth below.
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%
*Franklin Gold Fund, Franklin Natural Resources Fund and Franklin Real Estate
Securities Fund.
The percentage ranges for each fund may be changed from time to time by the
manager without the approval of shareholders. No more than 25% of each fund's
assets may be invested in any one underlying Franklin Templeton fund,
although each of the funds may invest up to 50% of its total assets in
Franklin Short-Intermediate U.S. Government Securities Fund and Franklin U.S.
Government Securities Fund.
DIRECT INVESTMENT IN SECURITIES AND OTHER INVESTMENT STRATEGIES. Each fund
may invest up to 5% of its assets directly in the types of securities in
which the underlying Franklin Templeton funds invest and may invest without
limitation in repurchase agreements and securities issued or backed by the
full faith and credit of the U.S. government. U.S. government securities
include U.S. Treasury bills, notes, and bonds; securities backed by the full
faith and credit of the U.S. government include those issued by the
Government National Mortgage Association.
Each fund may also engage directly in the types of investment strategies
employed by the underlying Franklin Templeton funds. Each fund may invest in
futures and related options for the purpose of managing the desired effective
asset allocation of the fund, but not for speculation. In addition, each
fund may hedge its investments to protect the fund against a decline in
market value. No fund intends to commit more than 5% of its assets to these
investment strategies. Each fund may also invest up to 100% of its assets in
the same types of securities that the underlying Franklin Templeton funds may
invest in for temporary purposes.
PURCHASES OF SHARES OF THE UNDERLYING FRANKLIN TEMPLETON FUNDS. The funds
invest only in Class Z shares of Mutual Discovery Fund, Mutual European Fund
and Fund Mutual Shares Fund and Advisor Class shares of the other underlying
Franklin Templeton 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 Franklin Templeton funds. The funds, however, will
indirectly bear their pro rata share of the fees and expenses incurred by the
underlying Franklin Templeton 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 Franklin Templeton funds in
which it invests.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
DIVERSIFICATION. Diversification involves limiting the amount of money
invested in any one issuer or, on a broader scale, in a particular industry
or group of industries. Non-diversified funds may invest a greater portion
of their assets in the securities of one issuer than diversified funds.
Economic, business, political or other changes can affect all securities of a
similar type. A non-diversified fund may be more sensitive to these changes.
Each of the funds is a non-diversified fund because it invests in a
limited number of mutual funds. The underlying Franklin Templeton funds are
diversified funds with the exception of Franklin Global Government Income
Fund, Franklin Natural Resources Fund, Franklin Real Estate Securities Fund,
Franklin Templeton Hard Currency Fund, Franklin Value Fund, and Templeton
Global Bond Fund.
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. The portfolio turnover rate for Conservative Target Fund
was 141.96% for the fiscal year ended July 31, 1998, and 33.30% for the
fiscal year ended July 31, 1997. The portfolio turnover rate for Growth
Target Fund was 118.19% for the fiscal year ended July 31, 1998, and 65.52%
for the fiscal year ended July 31, 1997. Although the funds generally
anticipate that portfolio turnover will not exceed 100% per year, in any
given year turnover may exceed that level for a variety of reasons. These
include higher than anticipated market volatility, as well as changes in
portfolio composition and relative performance of the underlying Franklin
Templeton funds. High portfolio turnover may increase the fund's transaction
costs.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional
investment restrictions that govern its activities. Those that are identified
as "fundamental" may only be changed with shareholder approval. The others
may be changed by the Board alone. For a list of these restrictions and more
information about the funds' investment policies, please see "How Do the
Funds Invest Their Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when a fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of these guidelines.
For more information about the various types of investments and strategies of
each fund and the underlying Franklin Templeton funds, see "What Are the
Risks of Investing in the Funds?"; "What Are the Risks of Investing in the
Underlying Franklin Templeton Funds?"; "How Do the Underlying Franklin
Templeton Funds Invest Their Assets?"; "Other Investment Policies of the
Underlying Franklin Templeton Funds"; and the Appendix and the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
There is no assurance that the fund will meet its investment goal.
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 share in any change in the value of
the securities owned by the fund. The ability of each fund to meet its
investment goal depends on its asset allocation among the underlying Franklin
Templeton funds and the ability of those funds to meet their investment
goals. There can be no assurance that the underlying Franklin Templeton funds
will meet their investment goals.
In addition to the factors that affect the value of any particular security
that a fund or an underlying Franklin Templeton fund may own, the value of
fund shares may also change with movements in the stock and bond markets as a
whole. The value of each fund varies from day to day, reflecting changes in
these markets and the values of the underlying Franklin Templeton funds. The
value of an investment in Growth Target Fund tends to fluctuate more than an
investment in Moderate Target Fund or Conservative Target Fund due to its
more aggressive mix of investments in the underlying Franklin Templeton
funds. Similarly, Moderate Target Fund tends to fluctuate more than an
investment in Conservative Target Fund.
The underlying Franklin Templeton funds may buy securities or engage in
investment strategies that involve certain risks. As a result, each fund will
be subject to some of the risks resulting from these investments. To the
extent the funds directly engage in investment strategies or invest directly
in securities, they are subject to the same types of risks as the underlying
Franklin Templeton funds.
WHAT ARE THE RISKS OF INVESTING IN THE UNDERLYING FRANKLIN TEMPLETON FUNDS?
EQUITY SECURITIES RISK. To the extent an underlying Franklin Templeton fund
invests in equity securities, general market movements in any country where
the fund has investments are likely to affect the value of the securities it
owns in that country and the fund's share price may also be affected. Thus,
a decline in the market, expressed for example by a drop in a securities
index such as the Dow Jones Industrials or the Standard & Poor's 500 average,
may result in a decline in an underlying Franklin Templeton fund's share
price. Of course, individual and worldwide stock markets have increased and
decreased, sometimes very dramatically, in the past. These changes are likely
to occur again in the future at unpredictable times.
FIXED INCOME SECURITIES RISK. Underlying Franklin Templeton funds investing
in fixed-income securities are subject to risks, including the following:
o INTEREST RATE RISK is the risk that changes in interest rates can
reduce the value of a security. When interest rates rise, fixed income
security prices fall. The opposite is also true: fixed income security
prices go up when interest rates fall. Generally, interest rates rise
when future inflation rates are expected to increase. This often
occurs during periods of strong economic growth, but may also occur
during periods of rising government budget deficits or when the value
of the U.S. dollar declines against other currencies. Interest rates
generally fall when future inflation rates are expected to decline.
This often occurs during periods of slower economic growth. Securities
with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
o INCOME RISK is the risk that a fund's income will decrease due to
falling interest rates. Since a fund can only distribute what it earns,
a fund's distributions to its shareholders may decline when interest
rates fall.
o CREDIT RISK is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value. Even
securities supported by credit enhancements have the credit risk of the
entity providing the credit support. Credit support provided by a
foreign entity may be less certain because of the possibility of
adverse foreign economic, political or legal developments that may
affect the ability of that foreign entity to meet its obligations.
Changes in the credit quality of the credit provider could affect the
value of the security and the fund's share price.
o MARKET RISK is the risk that a security's value will be reduced by
market activity or the results of supply and demand. This is a basic
risk associated with all securities. When there are more sellers than
buyers, prices tend to fall. Likewise, when there are more buyers than
sellers, prices tend to increase.
o CALL RISK is the likelihood that a security will be prepaid (or
"called") before maturity. An issuer is more likely to call its bonds
when interest rates are falling, because the issuer can issue new bonds
with lower interest payments. If a bond is called, a fund may have to
replace it with a lower-yielding security.
Independent rating organizations such as Moody's and S&P rate securities
based upon their assessment of the financial soundness of the issuer.
Generally, a lower rating indicates a higher risk. Please see the Appendix
for a description of the ratings.
HIGH YIELD SECURITIES RISK. Securities rated below investment grade,
sometimes called "junk bonds," generally have more credit risk than
higher-rated securities and a fund investing in these securities will have
greater price swings than a fund emphasizing higher-rated debt securities.
Underlying Franklin Templeton funds investing in high yield debt securities
are subject to risks, including the following:
o SUBSTANTIAL CREDIT RISK. High yield debt securities carry a high
degree of credit risk. Companies issuing high yield debt securities are
not as strong financially as those with higher credit ratings and their
ability to make interest payments or repay principal is less certain.
These companies are more likely to encounter financial difficulties and
to be materially affected by them. They are also more vulnerable to
changes in the economy, such as a recession or a sustained period of
rising interest rates, that could prevent them from making interest and
principal payments in a timely manner.
o DEFAULTED DEBT SECURITIES RISK. In some cases, an underlying Franklin
Templeton fund may own securities where the issuer is not paying or
stops paying interest and/or principal on the securities. Payments on
these securities may never resume. These securities may be worthless
and the fund could lose its entire investment, which may lower the
fund's Net Asset Value. Defaulted securities tend to lose much of their
value before they default, in which case the fund's Net Asset Value
will be adversely affected before the issuer stops making interest or
principal payments.
o VOLATILITY RISK. The market prices of high yield debt securities
fluctuate more than higher-quality securities and may decline
significantly in periods of general or regional economic difficulty.
Prices are especially sensitive to developments affecting the company's
business and business prospects and to changes in the ratings assigned
by ratings organizations such as S&P and Moody's. Prices are often
closely linked with the company's stock prices and typically will rise
and fall in response to business developments, general stock market
activity and other factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp
price swings due to changes in economic conditions, stock market
activity, large sustained sales by major investors, a high-profile
default, or other factors. Price swings in the high yield securities
market can adversely affect the prices of all high yield securities.
o REDUCED LIQUIDITY RISK. The high yield debt securities market is
generally less liquid than the market for higher-quality bonds and
large purchases or sales of these securities can cause sudden and
substantial changes in their market prices. Many of these securities do
not trade frequently, and when they do trade their prices may be
significantly higher or lower than expected. In less liquid markets
such as this, it is generally more difficult to sell securities
promptly at an acceptable price, which may limit the fund's ability to
sell securities in response to specific economic events or to meet
redemption requests.
The underlying Franklin Templeton funds that invest in high yield securities
rely on their investment manager's judgment, analysis and experience in
evaluating the credit and other risks of high yield securities and the high
yield market as a whole. In order for the funds to achieve their investment
goals, the investment manager must correctly predict general economic and
market trends and evaluate particular issuer's financial resources,
sensitivity to economic conditions and trends, operating history and quality
of management, as well as regulatory and other matters.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets.
The political, economic and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The underlying Franklin Templeton funds may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in
foreign courts than with respect to domestic issuers in U.S. courts.
Some of the countries in which the underlying Franklin Templeton funds invest
are considered developing or emerging markets. Investments in these markets
are subject to all of the risks of foreign investing generally, and have
additional and heightened risks due to a lack of legal, business and social
frameworks to support securities markets.
Emerging markets involve additional significant risks, including:
o political and social uncertainty (for example, regional conflicts and
risk of war)
o currency exchange rate volatility
o pervasiveness of corruption and crime
o delays in settling portfolio transactions
o risk of loss arising out of the system of share registration and custody
o comparatively smaller and less liquid than developed markets
o dependency upon foreign economic assistance and international trade
o less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the U.S.
All of these factors make developing market equity and fixed-income
securities' prices generally more volatile than securities issued in
developed countries.
CURRENCY RISK. Investments of certain of the underlying Franklin Templeton
funds may be denominated in foreign currencies so that changes in the foreign
currency exchange rates will affect the value of what a fund owns and thus
the price of its shares. Currency valuations have increased and decreased,
sometimes very dramatically, in the past. These changes are likely to occur
again in the future at unpredictable times.
SMALLER COMPANIES RISK. Certain underlying Franklin Templeton funds invest in
the securities of companies with small market capitalizations. Historically,
smaller company securities have been more volatile in price than larger
company securities, especially over the short term. Among the reasons for
the greater price volatility are the less certain growth prospects of smaller
companies, the lower degree of liquidity in the markets for such securities
and the greater sensitivity of smaller companies to changing economic
conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions, futures contracts, swap agreements and
collateralized mortgage obligations are considered derivative investments. To
the extent an underlying Franklin Templeton fund enters into these
transactions, their success will depend upon the investment manager's ability
to predict pertinent market movements.
CONCENTRATION RISK. The following underlying Franklin Templeton funds may
concentrate their investments in a particular industry or sector: Franklin
Gold Fund, Franklin Natural Resources Fund, Franklin Real Estate Securities
Fund, Franklin Value Fund, Franklin Templeton Hard Currency Fund, Franklin
Utilities Fund, and Templeton Global Bond Fund. Franklin Global Government
Income Fund may invest more than 25% of its assets in the securities of
foreign governments.
For more information about the risks of investing in the funds and underlying
Franklin Templeton funds, please see the Appendix and the SAI.
HOW DO THE UNDERLYING FRANKLIN TEMPLETON FUNDS INVEST THEIR ASSETS?
The following is a summary of the investment goals and strategies of the
underlying Franklin Templeton funds and the types of securities the funds
invest in. The goal of each fund is fundamental, which means it may not be
changed without the approval of the fund's shareholders. Additional
information about the funds' investment strategies may be found in the
Appendix and the SAI. For a free copy of a prospectus of any of these funds,
call 1-800/DIAL BEN.
EQUITY FUNDS
The following underlying Franklin Templeton funds invest primarily in equity
securities.
U.S. EQUITY FUNDS
FRANKLIN EQUITY FUND ("EQUITY"). The principal investment goal of Equity is
capital appreciation. The fund's secondary goal is to provide current income
return through the receipt of dividends or interest from its investments.
The fund's investment strategy is generally to invest in companies that the
manager believes have strong future growth prospects and whose securities are
undervalued relative to their industry. The fund uses traditional fundamental
analysis and active management along with disciplined, quantitative models to
identify what the manager believes are potentially rewarding investments that
may provide enhanced value to shareholders over the long term.
The fund tries to achieve its investment goal by investing at least 65% of
its assets in equity securities which may be traded on a securities exchange
or in the over-the-counter market. The fund may invest up to 35% of its
assets in other securities that are consistent with the fund's goal.
EQUITY SECURITIES. The fund's primary investments are in common stock.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may buy debt securities which are rated Baa by Moody's or BBB by S&P or
better; or unrated debt which it determines to be of comparable quality. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's).
SMALLER COMPANIES. The fund may invest in relatively new or unseasoned
companies that are in their early stages of development, or in new and
emerging industries where the opportunity for rapid growth is expected to be
above average. In general, the fund will invest in smaller companies with a
market capitalization of less than $1 billion at the time of the fund's
investment. Market capitalization is the total market value of a company's
outstanding common stock. The fund currently does not intend to invest more
than 25% of its total assets in securities of small capitalization companies.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund will ordinarily buy
foreign securities traded in the U.S. It may buy the securities directly in
foreign markets. The fund may buy Depositary Receipts.
Although the fund may invest without limit in foreign securities, it
presently intends to limit its investments to no more than 15% of its total
assets in securities of companies of developed foreign nations.
CONVERTIBLE SECURITIES. The fund does not intend to invest more than 10% of
its total assets in convertible securities.
REITS. The fund may invest in real estate investment trusts ("REITs"). The
fund does not intend to invest more than 10% of its total assets in REITs.
FRANKLIN GROWTH FUND ("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 some of which may
yield little or no current income. 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. The fund may keep a significant portion of
its assets in cash or cash equivalents from time to time. There are no
restrictions on investment of Growth's assets in foreign securities. The fund
may purchase American Depositary Receipts, and does not presently intend to
invest more than 25% of its net assets in foreign securities not publicly
traded in the U.S.
FRANKLIN UTILITIES FUND ("UTILITIES"). The investment objectives of Utilities
are both capital appreciation and current income. As a fundamental policy,
the fund's assets may be invested in securities of an issuer engaged in the
public utilities industry, or held in cash or cash equivalents. The public
utilities industry includes the manufacture, production, generation,
transmission and sale of gas, water and electricity and companies involved in
providing services related to these activities. The industry also includes
issuers engaged in the communications field, such as telephone, cellular,
paging, telegraph, satellite, microwave and other companies that provide
communication facilities or services for the public's benefit. As required by
the SEC, at least 65% of the fund's investments will be in the securities of
issuers engaged in the public utilities industry. Under normal circumstances,
the fund expects to have substantially all of its assets invested in
securities issued by these types of issuers.
To achieve its investment objectives, the fund invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if,
in the opinion of the fund's investment manager, these securities appear to
offer attractive opportunities for capital appreciation. The fund may also
invest in preferred stocks and bonds issued by issuers engaged in the public
utilities industry. When buying fixed-income debt securities, the fund may
invest in securities regardless of their rating depending upon prevailing
market and economic conditions, including securities in the lowest rating
categories and unrated securities. Most of the fund's investments, however,
are rated at least Baa by Moody's or BBB by S&P. These ratings represent the
opinions of the rating services with respect to the securities and are not
absolute standards of quality. They will be considered in connection with the
investment of the fund's assets but will not be a determining or limiting
factor.
With respect to unrated securities, it is also the fund's intent to buy
securities that, in the view of the manager, would be comparable in quality
to the fund's rated securities and have been determined to be consistent with
the fund's objectives without exposing the fund to excessive risk. The fund
will not buy issues that are in default or that the manager believes involve
excessive risk.
FRANKLIN SMALL CAP GROWTH FUND ("SMALL CAP"). The investment goal of the fund
is long-term capital growth. The fund tries to achieve its investment goal by
investing primarily in equity securities of small capitalization growth
companies. The fund may also invest up to 35% (measured at the time of
purchase) of its total assets in any combination of
o equity securities of larger capitalization companies which its investment
manager believes have strong growth potential, and
o relatively well-known, larger companies in mature industries which the
investment manager believes have the potential for capital appreciation,
if the investment presents a favorable investment opportunity consistent with
the fund's investment goal.
The fund may invest up to 5% of its total assets in corporate debt securities
that the investment manager believes have the potential for capital
appreciation as a result of improvement in the creditworthiness of the
issuer. The receipt of income from debt securities is incidental to the
fund's investment goal of capital growth.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund will invest in securities rated B or above by Moody's or S&P, or in
unrated securities of comparable quality. The fund will not invest more than
5% of its total assets in non-investment grade securities (rated lower than
BBB by S&P or Baa by Moody's).
SMALL COMPANIES. Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of small capitalization
growth companies. In general, companies in which the fund will invest have a
market capitalization of less than $1.5 billion at the time of the fund's
investment. Market capitalization is the total market value of a company's
outstanding common stock. The securities of small capitalization companies
are traded on the NYSE and American Stock Exchange and in the
over-the-counter market.
In selecting these securities for the fund's portfolio, the investment
manager identifies companies with relatively small market capitalization that
it believes are positioned for rapid growth in revenues or earnings and
assets. The investment manager believes that the securities of such companies
may experience significant capital appreciation. Small companies often pay no
dividends, and current income is not a factor in the selection of stocks.
The fund tries to provide investors with potentially greater long-term
rewards by investing in securities of small companies that may offer greater
potential for capital appreciation. The investment manager will select small
company equity securities for the fund based on 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.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest up to 25% of
its total assets in foreign securities, including those of developing or
undeveloped markets, and sponsored or unsponsored Depositary Receipts. The
fund currently intends to limit its investments in foreign securities to 10%
of its total assets.
GENERAL. The fund may invest up to 10% of its total assets in REITs. The fund
may not invest more than 10% of its net assets in securities of issuers with
less than three years continuous operation.
FRANKLIN VALUE FUND ("VALUE"). The investment objective of the fund is to
seek 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. 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) or companies that have
suffered sharp price declines but in the manager's opinion, still have
significant potential ("fallen angels"). Purchases may include companies in
cyclical businesses, turnarounds, and companies emerging from bankruptcy.
Purchase decisions may also be influenced by company stock buy-backs and
insider purchases and sales. 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.
The fund may invest up to 25% of its net assets lower quality, 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 and trade claims.
While Value currently intends to invest primarily in domestic securities, it
may invest up to 25% of its total assets in foreign securities. Value may
buy sponsored or unsponsored Depositary Receipts. 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") and asset-backed securities.
FRANKLIN REAL ESTATE SECURITIES FUND ("REAL ESTATE"). The investment goal of
the fund is to maximize total return. The fund tries to achieve its
investment goal by investing, under normal market conditions, at least 65% of
its total assets in equity securities of companies operating in the real
estate industry. This includes:
o companies qualifying as REITs for federal income tax purposes; and
o companies, such as homebuilders and developers, that have at least 50% of
their assets or revenues attributable to the ownership, construction,
management or sale of residential, commercial or industrial real estate.
The fund may invest up to 35% of its total assets in securities of issuers
engaged in businesses closely related to the real estate industry. This
includes 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 which have significant real estate
holdings (at least 50% of their assets).
The fund's primary REIT investments are in equity REITs.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest up to 10% of
its total assets in securities of issuers in any foreign country, developed
or developing, and in Depositary Receipts.
CONVERTIBLE SECURITIES. The fund may also invest in convertible securities.
MUTUAL SHARES FUND ("MUTUAL SHARES"). The principal investment goal of Mutual
Shares is capital appreciation, which may occasionally be short-term. The
secondary investment goal is income.
The fund may invest in equity securities, debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities) ("convertible securities"). The fund generally
invests in securities which, in the opinion of its investment adviser, are
available at prices less than their actual value based on certain recognized
objective criteria ("intrinsic value").
There are no limitations on the percentage of the fund's assets which may be
invested in equity securities, debt securities, convertible securities or
cash equivalent investments.
GENERAL POLICIES AND STRATEGIES. The fund's investment manager selects
investments for each fund based upon its analysis and research. This analysis
and research takes into account the factors the manager determines are
relevant, which may include, among other factors, (i) the relationship of a
security's book value to market value, (ii) cash flow and (iii) multiples of
earnings of comparable securities. The relationship of a security's "book
value to market value" is an analysis of the difference between the price at
which a security is trading in the market, as compared to the value of that
security based upon an analysis of certain information contained in a
company's financial statements. Cash flow analysis considers the inflow and
outflow of money into and out of a company. An analysis of "multiples of
earnings of comparable securities" involves a review of the market values of
comparable companies as compared to their earnings, and then comparing the
results of this review with a comparison of the earnings of the company in
question with its market value. These factors are not applied according to a
predetermined formula. Rather, the investment manager examines each security
separately. The manager has not established guidelines as to the size of an
issuer, its earnings or the industry in which it operates in order for a
security to be excluded as unsuitable for purchase by a fund.
INVESTMENT IN THE SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT
TO TENDER OR EXCHANGE OFFERS. The fund also seeks to invest in the securities
of domestic or foreign companies which are in the process of reorganizing or
restructuring ("Reorganizing Companies") or as to which there exist
outstanding tender or exchange offers. The fund may from time to time
participate in such tender or exchange offers. A tender offer is an offer by
the company itself or by another company or person to purchase a company's
securities at a higher (or lower) price than the market value for such
securities. An exchange offer is an offer by the company or by another
company or person to the holders of the company's securities to exchange
those securities for different securities. Although there are no restrictions
limiting the extent to which the fund may invest in Reorganizing Companies,
the fund presently does not anticipate committing more than 50% of its assets
to such investments. In addition to typical equity and debt investments, the
fund's investments in Reorganizing Companies may include Indebtedness,
Participations and Trade Claims, as further described below.
INVESTING TO INFLUENCE OR CONTROL MANAGEMENT. The fund generally purchases
securities for investment purposes and not for the purpose of influencing or
controlling management of a company. However, in certain circumstances when
the fund's investment manager perceives that the fund may benefit, the
manager may use the fund's ownership interest in a company to seek to
influence or control management. The fund also may invest in entities whose
business is to acquire securities of companies for the purpose of influencing
or controlling management or with the expectation of taking over such
companies. The fund may also invest in a particular company which the manager
believes may be an attractive company to be taken over by another entity.
NON-U.S. SECURITIES. The fund may purchase securities of non-U.S. issuers and
may invest in Depositary Receipts.
The fund may purchase securities whose values are quoted and traded in any
currency in addition to the U.S. dollar. In order to avoid the unexpected
fluctuations in value as a result of relative currency values, the fund
expects to employ an investment technique called "hedging," which attempts to
reduce or eliminate changes in a security's value resulting from changing
currency exchange rates.
DEBT SECURITIES. The debt securities in which the fund may invest may be
either unrated or rated by one or more independent rating organizations such
as S&P or Moody's.
The debt securities which the fund may purchase may be rated in any rating
category established by the independent rating organizations. Generally, the
lower the rating category, the more risky is the investment. Debt securities
rated BBB or lower by S&P or Moody's are considered to be high yield, high
risk debt securities, commonly known as "junk bonds." The lowest rating
category established by Moody's is "C," and by S&P, is "D." Debt securities
with a D rating are in default as to the payments of principal and interest
which means that the issuer does not have the financial soundness to meet its
interest payments or its repayment schedule to security holders. The fund may
invest to an unlimited degree in junk bonds.
The fund will generally invest in debt securities under circumstances similar
to those under which they will invest in equity securities; namely, when, in
the investment manager's opinion, such debt securities are available at
prices less than their intrinsic value. Investment in fixed-income securities
under these circumstances may lead to the potential for capital appreciation.
Consequently, when investing in debt securities, a debt security's rating is
given less emphasis in the manager's investment decision-making process.
Historically, the fund has invested in debt securities issued by Reorganizing
Companies because such securities often are available at less than their
intrinsic value. Debt securities of such companies typically are unrated,
lower rated, in default or close to default. While posing a greater risk than
higher rated securities with respect to payment of interest and repayment of
principal at the price at which the debt security was originally issued, such
debt securities typically rank senior to the equity securities of
Reorganizing Companies and may offer the potential for certain investment
opportunities.
DIRECT INVESTMENT IN INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. From time
to time, the fund may purchase the direct indebtedness of various companies
("Indebtedness"), or participations in such Indebtedness. Indebtedness can be
distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the SEC, and
which is held by a large group of investors. Indebtedness may not be a
security, but rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the Indebtedness
of companies, the fund steps into the shoes of the financial institution
which made the loan to the company prior to its restructuring or refinancing.
Indebtedness purchased by the fund may be in the form of loans, notes or
bonds.
The length of time remaining until maturity on the Indebtedness is one factor
the fund's manager considers in purchasing a particular Indebtedness.
Indebtedness which represents a specific indebtedness of the company to a
bank is not considered to be a security issued by the bank selling it. The
fund purchases loans from national and state chartered banks as well as
foreign banks. The fund normally invests in the Indebtedness of a company
which Indebtedness has the highest priority in terms of payment by the
company, although on occasion lower priority Indebtedness also may be
acquired.
The fund may also purchase participation interests in Indebtedness
("Participations"). Participations represent fractional interests in a
company's Indebtedness. The financial institutions which typically make
Participations available are banks or insurance companies, governmental
institutions, such as the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation, or certain
organizations such as the World Bank which are known as "supranational
organizations." Supranational organizations are entities established or
financially supported by the national governments of one or more countries to
promote reconstruction or development.
The fund may also purchase trade claims and other direct obligations or
claims ("Trade Claims") of Reorganizing Companies. Trade Claims generally
represent money due to a supplier of goods or services to such Reorganizing
Company.
Indebtedness, Participations and Trade Claims may be illiquid.
MORTGAGE-BACKED SECURITIES. The fund may invest in mortgage-backed
securities. Two principal types of mortgage-backed securities are CMOs and
real estate mortgage investment conduits (REMICs).
The fund may also invest directly in distressed mortgage obligations. A
direct investment in a distressed mortgage obligation involves the purchase
by the fund of a lender's interest in a mortgage granted to a borrower, where
the borrower has experienced difficulty in making its mortgage payments, or
for which it appears likely that the borrower will experience difficulty in
making its mortgage payments. As is typical with mortgage obligations,
payment of the loan is secured by the real estate underlying the loan. By
purchasing the distressed mortgage obligation, a fund steps into the shoes of
the lender from a risk point of view.
MUTUAL DISCOVERY FUND ("DISCOVERY"). The principal goal of Discovery is
long-term capital appreciation. Discovery does not have a secondary
investment goal. Discovery's investment policies and strategies are virtually
identical to those of Mutual Shares, except that Discovery seeks to achieve
its investment objective by investing proportionately more of its assets in
smaller sized and may invest 50% or more of its assets in foreign securities.
Investing in smaller capitalized companies may involve greater risks than
investing in securities of larger companies. The smaller companies in which
Discovery invests often are not well known, their securities may trade in the
securities markets below their book values and may not be followed by
established securities analysts.
See "Mutual Shares Fund" above for the other investment strategies of this
fund.
FIXED INCOME FUNDS
The following underlying Franklin Templeton funds invest primarily in fixed
income securities.
U.S. FIXED INCOME FUNDS
FRANKLIN BOND FUND ("BOND FUND"). The investment goal of the fund is to
provide a high level of current income consistent with the preservation of
capital, with capital appreciation over the long term as a secondary goal.
The fund will allocate assets among securities in various market sectors
based on the investment manager's assessment of changing economic, market,
industry and issuer conditions. The investment manager will use a "top-down"
analysis of macroeconomic trends, combined with a "bottom-up" fundamental
analysis of market sectors, industries and issuers to attempt to take
advantage of varying sector reactions to economic events. The manager will
evaluate business cycles, changes in yield curves and apparent imbalances in
values between and within markets, as well as the risks of investing in
particular foreign markets. Through diversification among various market
sectors and its own independent credit analysis of securities being
considered for the fund's portfolio, the investment manager attempts to
reduce the risks of investing in non-investment grade securities.
The fund tries to achieve its investment goal by investing at least 65% of
its total assets in investment grade fixed-income securities, including debt
securities and mortgage-backed and asset-backed securities. Up to 35% of the
fund's total assets may be invested in non-investment grade fixed-income
securities.
DEBT SECURITIES. The fund may buy both rated and unrated fixed-income
securities. The fund may buy fixed-income securities which are rated B or
better by Moody's or S&P or unrated securities which it determines to be of
comparable quality. The fund may buy securities of issuers in any foreign
country, developed or developing.
Through diversification among various market sectors and its own independent
analysis for securities being considered for the fund's portfolio, the fund's
investment manager attempts to reduce the risks of investing in
non-investment grade securities.
MORTGAGE-BACKED SECURITIES. The fund may invest in mortgage-backed
securities, including CMOs.
ASSET-BACKED SECURITIES. The fund may invest in asset-backed securities.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills, notes and
bonds, which are direct obligations of the U.S. government, backed by the
full faith and credit of the U.S. Treasury, and in securities issued or
guaranteed by federal agencies. The fund may also invest in securities issued
or guaranteed by foreign governments and their agencies.
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
("SHORT-INTERMEDIATE"). The investment objective of Short-Intermediate is to
provide as high a level of current income as is consistent with prudent
investment practices while seeking preservation of shareholders' capital. The
fund intends to invest up to 100% of its net assets in U.S. government
securities. As a fundamental policy, Short-Intermediate must invest at least
65% of its net assets in U.S. government securities. It is the investment
policy of the fund (which may be changed upon notice to shareholders) to
maintain the average dollar weighted maturity of its portfolio in a range of
two to five years. Within this range, the fund intends to emphasize an
average weighted maturity of 3-1/2 years or less.
Short-Intermediate may invest in obligations either issued or guaranteed by
the U.S. government and its agencies or instrumentalities including, but not
limited to: direct obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds; and obligations of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Banks for Cooperatives
(including Central Bank for Cooperatives), Federal Land Banks, Federal
Intermediate Credit Banks, Tennessee Valley Authority, Export-Import Bank of
the United States, Commodity Credit Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage Corporation,
or National Credit Union Administration. Since inception, the assets of the
fund have been invested solely in direct obligations of the U.S. Treasury and
in repurchase agreements collateralized by U.S. Treasury obligations. The
level of income achieved by Short-Intermediate may not be as high as that of
other funds which invest in lower quality, longer-term securities. The fund
may invest in zero coupon bonds issued or guaranteed by the U.S. government
or its agencies or instrumentalities and in inflation-indexed securities
issued by the U.S. Treasury.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND ("GOVERNMENT SECURITIES"). The
investment objective of Government Securities is income through investment in
a portfolio limited to securities that 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 buy GNMAs whose 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 ("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 securities
rated lower than "investment grade" for the fund's portfolio, the investment
manager relies primarily on its own credit analysis, which consists of 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. The intermediate-term
obligations 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, 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.
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 presently has no intention of investing more than 25% of its assets in
debt securities of foreign governments. The fund may invest in securities
issued in any currency and may hold foreign currency to the extent consistent
with its objective and policies. Securities of issuers within a given country
may be denominated in the currency of that or another country, or in
multinational currency units.
FRANKLIN'S AGE HIGH INCOME FUND ("AGE"). The investment goal of the fund is
to earn a high level of current income. As a secondary goal, the fund seeks
capital appreciation to the extent it is possible and consistent with the
fund's principal goal. The fund will generally invest in high yield, lower
rated debt securities. High yield debt securities are often issued by the
following types of companies:
o Companies lacking the financial strength needed to receive an
"investment grade" rating;
o Companies that do not have the track record needed to receive an
"investment grade" rating. These include companies in relatively new
industries such as the cellular communications industry;
o Companies that have borrowed to finance acquisitions or to expand
their operations;
o Companies seeking to refinance their debt at lower rates; and
o Companies that have been downgraded due to financial difficulties.
Lower rated securities generally pay higher yields than more highly rated
securities to compensate investors for the higher risk. The fund seeks to
invest in securities offering the highest yield and expected total return
without taking on an excessive amount of risk.
The fund may also invest in "zero coupon bonds" and in dividend-paying equity
securities.
QUALITY AND RATINGS. The fund may buy both rated and unrated debt securities.
The fund may buy debt securities regardless of their rating and up to 100% of
the portfolio may be invested in non-investment grade securities. The fund
may invest up to 10% of its total assets in debt securities where the issuer
is not currently making interest payments (defaulted debt securities). It is
the fund's intent not to buy unrated securities that are comparable to
securities rated below B by Moody's or S&P. As of May 31, 1998, approximately
92.72% of the fund's net assets were invested in lower rated and comparable
quality unrated debt securities.
Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis
at the time of the rating. Credit quality in the high yield debt market,
however, can change suddenly and unexpectedly, and credit ratings may not
reflect the issuer's current financial condition. For these reasons, the
fund's manager does not rely principally on the ratings assigned by rating
agencies, but performs its own independent investment analysis of securities
being considered for the fund's portfolio. In its analysis, the fund's
manager considers a variety of factors, including:
o the experience and managerial strength of the issuer;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the issuer's changing financial condition and market recognition of
the change; and
o relative values based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, and earnings prospects.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest in securities
of issuers in any foreign country, developed or developing, and may buy
foreign securities that are traded in the U.S. or securities of U.S. issuers
that are denominated in a foreign currency. The fund may also invest in
Depositary Receipts. 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
The following underlying Franklin Templeton funds primarily invest in equity
and debt securities of non-U.S. companies and governments.
INTERNATIONAL EQUITY FUNDS
MUTUAL EUROPEAN FUND ("EUROPEAN"). The principal investment goal of European
is capital appreciation, which may occasionally be short term. The secondary
goal is income. European's investment policies and strategies are virtually
identical to those of Mutual Shares, except that European will normally
invest at least 65% of its total assets in the securities of issuers (i)
organized under the laws of, (ii) whose principal business operations are
located in, or (iii) at least 50% of whose revenue is earned from, European
countries. For purposes of the fund's investments, European countries means
all of the countries that are members of the European Union, the United
Kingdom, Scandinavia, Eastern and Western Europe and those regions of Russia
and the former Soviet Union that are considered part of Europe. European may
also invest up to 35% of its total assets in securities of U.S. issuers as
well as in securities of issuers from the Levant, the Middle East and the
remaining regions of the world.
It is currently anticipated that European will invest primarily in securities
of issuers in Western Europe and Scandinavia. European will normally invest
in securities from at least five different countries although, from time to
time, it may invest all of its assets in a single country. Under normal
circumstances, European, at the close of each taxable year, will have at
least 50% of its assets invested in securities of foreign issuers.
See "Mutual Shares Fund" above for additional information about the
investment strategies of this fund.
TEMPLETON FOREIGN FUND ("TEMPLETON FOREIGN"). The investment goal of the fund
is long-term capital growth. The fund tries to achieve its investment goal by
a flexible policy of investing in the equity and debt securities of companies
and governments outside the U.S. The fund may invest up to 100% of its total
assets in emerging markets, including up to 5% of its total assets in Russian
securities.
EQUITY SECURITIES. The fund's primary investments are in common stock.
In selecting equity securities, the fund's investment manager does a
company-by- company analysis, rather than focusing on a specific industry or
economic sector. The manager concentrates primarily on the market price of a
company's securities relative to its view regarding the company's long-term
earnings potential. A company's historical value measures, including price/
earnings ratios, profit margins and liquidation value, will also be
considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may buy debt securities which are rated Caa by Moody's or CCC by S&P or
better; or unrated debt which it determines to be of comparable quality. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's), although the fund may invest up to 10% of its total assets in
defaulted debt securities.
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
TEMPLETON DEVELOPING MARKETS TRUST ("DEVELOPING MARKETS"). The investment
goal of the fund is long-term capital appreciation. The fund tries to achieve
its investment goal by investing, under normal market conditions, at least
65% of its total assets in equity securities of developing market issuers.
The fund normally will invest in at least three developing market countries.
The fund may invest up to 100% of its total assets in emerging markets,
including up to 5% of its total assets in Russian securities.
FOR PURPOSES OF THE FUND'S INVESTMENTS, DEVELOPING OR EMERGING MARKET
COUNTRIES INCLUDE THOSE CONSIDERED SUCH BY THE WORLD BANK, THE INTERNATIONAL
FINANCE CORPORATION, OR THE UNITED NATIONS. IN ADDITION, DEVELOPING MARKET
EQUITY SECURITIES MEANS THOSE ISSUED BY:
o COMPANIES WITH THEIR PRINCIPAL SECURITIES TRADING MARKET WITHIN A
DEVELOPING MARKET COUNTRY, AS DEFINED ABOVE; OR
o COMPANIES THAT DERIVE 50% OR MORE OF THEIR TOTAL REVENUE FROM EITHER
GOODS OR SERVICES PRODUCED OR SALES MADE IN DEVELOPING MARKET
COUNTRIES; OR
o COMPANIES ORGANIZED UNDER THE LAWS OF, AND WITH A PRINCIPAL OFFICE
IN, A DEVELOPING MARKET COUNTRY.
EQUITY SECURITIES. The fund's primary investments are in common stock.
In selecting equity securities, the manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. The
manager concentrates primarily on the market price of a company's securities
relative to its view regarding the company's long-term earnings potential. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may invest up to 35% of its total assets in debt securities which are
rated C or better by Moody's or S&P or unrated debt which it determines to be
of comparable quality. The fund may invest up to 10% of its total assets in
defaulted debt securities. At present, the fund does not intend to invest
more than 5% of its total assets in non-investment grade securities (rated
lower than BBB by S&P or Baa by Moody's).
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
CLOSED-END INVESTMENT COMPANIES. To encourage indirect foreign investment in
their capital markets, some countries, including South Korea, Chile and
India, have permitted the creation of closed-end investment companies. The
fund may invest up to 10% of its total assets in securities of these
companies.
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("SMALLER COMPANIES"). The
investment goal of the fund is long-term capital growth. The fund tries to
achieve its investment goal by investing primarily in the equity securities
of smaller companies of any nation. Under normal market conditions, the fund
will invest at least 65% of its total assets in issuers located in at least
three countries (including the U.S.). The fund may invest up to 35% of its
assets in securities other than equity securities, including debt securities.
SMALLER COMPANIES. The fund expects to invest 75% of its assets in companies
whose market capitalizations would place them (at the time of purchase) in
the same size range as companies falling in approximately the lowest 20%
range (based on their total market capitalization) whose equity securities
are 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
market capitalizations 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 issues 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 that the fund will not purchase
securities of companies with market capitalizations of more than $1 billion.
This policy may be changed by the Board without shareholder approval.
EQUITY SECURITIES. In selecting equity securities, the fund's manager does a
company-by-company analysis, rather than focusing on a specific industry or
economic sector. The manager concentrates primarily on the market price of a
company's securities relative to its view regarding the company's long-term
earnings potential. A company's historical value measures, including price/
earnings ratios, profit margins and liquidation value, will also be
considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's), although the fund may invest up to 10% of its total assets in
defaulted debt securities.
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
TEMPLETON FOREIGN SMALLER COMPANIES FUND ("FOREIGN SMALLER"). The investment
goal of the fund is long-term capital growth. The fund tries to achieve its
investment goal by investing primarily in equity securities of smaller
companies outside the U.S. SMALLER COMPANIES generally are those with market
capitalizations of less than $1 billion.
Under normal market conditions, the fund expects to invest at least 65% of
its total assets in smaller companies (i)located in, or (ii) deriving a
significant portion of their revenues from, or (iii) for which the principal
securities trading market is in any foreign country, including emerging
market countries.
The fund may invest up to 35% of its total assets in any combination of (i)
equity securities of larger capitalized issuers outside the U.S.; or (ii)
equity securities of issuers within the U.S. - the fund presently does not
expect to invest more than 5% of its assets in these securities; or (iii)
both rated and unrated debt securities - independent rating organizations
rate debt securities based upon their assessment of the financial soundness
of the issuer. Generally, a lower rating indicates higher risk. The fund may
buy debt securities which are rated C or better by Moody's or S&P; or unrated
debt which it determines to be of comparable quality. At present, the fund
does not intend to invest more than 5% of its total assets in non-investment
grade securities (rated lower than BBB by S&P or Baa by Moody's), including
defaulted securities.
EQUITY SECURITIES. The fund's primary investments are in common stock.
In selecting equity securities, the fund's manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector.
The manager concentrates primarily on the market price of a company's
securities relative to its view regarding the company's long-term earnings
potential. A company's historical value measures, including price/earnings
ratios, profit margins and liquidation value, will also be considered.
DEPOSITARY RECEIPTS. The fund may invest in American, European, and Global
Depositary Receipts. Depositary Receipts are certificates typically issued by
a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic corporation.
TEMPLETON GREATER EUROPEAN FUND ("GREATER EUROPEAN"). The investment goal of
the fund is long-term capital appreciation. The fund tries to achieve its
investment goal by investing, under normal market conditions, at least 75% of
its total assets in equity securities of Greater European companies.
For purposes of the fund's investments, "GREATER EUROPE" means Western,
Central and Eastern Europe (including Ukraine, Belarus, Latvia, Lithuania and
Estonia) and Russia. Greater European companies include those:
o organized under the laws of, or with a principal office in a Greater
European country; or
o with their principal equity securities trading market within Greater
Europe; or
o that derive 50% or more of their revenues or profits from goods produced or
sold, investments made, or services performed in Greater Europe or that have
50% or more of their assets situated in Greater Europe.
The fund may invest the remaining 25% of its total assets in any combination
of: (i) debt securities of Greater European companies or those issued or
guaranteed by Greater European government entities; (ii) equity and debt
securities of issuers domiciled outside Greater Europe; and (iii) short-term
and medium-term debt securities.
EQUITY SECURITIES. Currently the funds invest primarily in common stock.
In selecting equity securities, the fund's manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. The
manager concentrates primarily on the market price of a company's securities
relative to their view regarding the company's long-term earnings, assets and
cash flow potential. A company's historical value measures, including
price/earnings ratios, profit margins and liquidation value, will also be
considered.
DEBT SECURITIES. The fund may invest up to 25% of its total assets in debt
securities. The fund may buy both rated and unrated debt securities. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's or, if unrated, determined by the fund to be of comparable quality).
The fund may invest up to 5% of its total assets in defaulted debt
SECURITIES.
BRADY BONDS. The fund may invest up to 25% of its total assets in certain
debt securities referred to as "Brady Bonds." These are public-issue bonds of
developing countries that are created through an exchange of existing
commercial bank loans to sovereign entities for new obligations in connection
with a debt restructuring plan introduced by former U.S. Treasury Secretary,
Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have
been implemented in a number of countries to date including Argentina,
Brazil, Bulgaria, Costa Rica, Croatia, the Dominican Republic, Ecuador, Ivory
Coast, Jordan, the former Yugoslav Republic of Macedonia, Mexico, Nigeria,
Panama, Peru, the Philippines, Poland, Russia, Slovenia, Uruguay, Venezuela,
and Vietnam (collectively, the "Brady Countries").
Brady Bonds, if collateralized, are done so by U.S. Treasury zero coupon
bonds to ensure principal. Since many of the Brady Bonds have been issued
relatively recently, they do not have a long payment history.
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. In addition, many Brady Bonds currently
are rated below investment grade. Investments in Brady Bonds are subject to
the fund's current policy of not investing more than 5% of its total assets
in non-investment grade securities.
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
TEMPLETON PACIFIC GROWTH FUND ("PACIFIC GROWTH"). The investment goal of the
fund is long-term capital growth. The fund tries to achieve its investment
goal by investing at least 65% of its total assets in equity securities that
trade on Pacific Rim markets 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 Pacific Rim activities.
For purposes of the fund's investments, Pacific Rim countries include
Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand,
Pakistan, Philippines, Singapore, South Korea and Thailand.
Under normal market conditions, the fund will invest at least 65% of its
total assets in issuers in at least three of these countries.
The fund may invest up to 35% of its total assets in any combination of (i)
securities of issuers domiciled outside the Pacific Rim - these investments
may include securities of issuers that are linked by tradition, economic
markets, cultural similarities or geography to countries in the Pacific Rim
or that have operations in the Pacific Rim or that stand to benefit from
political and economic events in the Pacific Rim; or (ii) both rated and
unrated debt and synthetic convertible securities - independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates
higher risk. The fund may buy debt securities when they are rated Baa by
Moody's or BBB by S&P or better; or unrated debt which it determines to be of
comparable quality. The fund's investments in debt instruments may include
U.S. and foreign government and corporate securities, including Samurai
bonds, Yankee bonds and Eurobonds. The fund currently has no intention of
investing more than 5% of its net assets in synthetic convertible securities.
EQUITY SECURITIES. The fund's primary investments are in common stock.
In selecting equity securities, the fund's manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector.
The manager concentrates primarily on the market price of a company's
securities relative to its view regarding the company's long-term earnings
potential. A company's historical value measures, including price/earnings
ratios, profit margins and liquidation value, will also be considered.
DEPOSITARY RECEIPTS. The fund may invest in American and Global Depositary
Receipts.
TEMPLETON LATIN AMERICA FUND ("LATIN AMERICA"). The investment goal of the
fund is long-term capital appreciation. The fund tries to achieve its
investment goal by investing at least 65% of its total assets in the equity
and debt securities of Latin America issuers.
For purposes of the fund's investments, "LATIN AMERICA" countries include
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.
The fund may invest the remaining 35% of its total assets in any combination
of: (i) equity and debt securities of issuers domiciled outside Latin
America; and (iii) short-term and medium-term debt securities.
EQUITY SECURITIES. Currently the funds invest primarily in common stock.
In selecting equity securities, the fund's manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. The
manager concentrates primarily on the market price of a company's securities
relative to their view regarding the company's long-term earnings, assets and
cash flow potential. A company's historical value measures, including
price/earnings ratios, profit margins and liquidation value, will also be
considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's or, if unrated, determined by the fund to be of comparable quality).
The fund may invest up to 5% of its total assets in defaulted debt
securities.
BRADY BONDS. The fund may invest in certain debt securities referred to as
"Brady Bonds." Investments in Brady Bonds are subject to the fund's current
policy of not investing more than 5% of its total assets in non-investment
grade securities. Please see "Greater European" above for a description of
Brady Bonds.
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
INTERNATIONAL FIXED INCOME FUNDS
FRANKLIN TEMPLETON HARD CURRENCY FUND ("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,
follow economic policies conducive to continued low rates of inflation in the
future and currency appreciation versus the U.S. dollar over the long-term.
These currencies are often referred to as "hard currencies" and the economic
policies are often referred to as "sound money" policies. The "major
currencies" are: 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.
Hard Currency tries to keep foreign currency (non-U.S. dollar) exposure with
respect to 100% of its net assets. The fund may invest 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) to obtain an investment result that is
substantially the same as a direct investment in a foreign
currency-denominated instrument.
Under normal market conditions, Hard Currency will not expose its portfolio
in excess of 50% of its total assets to a single foreign currency.
Subject to specific fund restrictions, the fund may invest in money market
instruments and forward contracts denominated in any of the major currencies.
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
justify it.
Hard Currency will attempt to maintain a weighted average effective maturity of
120 days or less and will buy 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, chartered to finance development projects in member
countries; the European Union, a twelve-nation organization engaged in
cooperative economic activities; the economic union of various European
nations' steel and coal industries; and the Asian Development Bank, 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.
TEMPLETON GLOBAL BOND FUND ("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 Depositary Receipts. 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. 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.
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 ("GLOBAL GOVERNMENT"). The fund's
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 at least 65% of
its total assets in securities issued or guaranteed by domestic and foreign
governments and their political subdivisions, including the U.S. government,
its agencies, and authorities or instrumentalities. The fund considers
securities issued by central banks that are guaranteed by their national
governments to be government securities. The fund selects investments 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, the fund
invests at least 65% of its assets 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").
Under normal economic conditions, the fund invests at least 65% of its total
assets 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 its
investment manager expects interest rates worldwide or in a particular
country to rise, and longer when interest rates are expected to fall.
The fund may also invest in other fixed-income securities of both domestic
and foreign issuers, including 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. 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 may also invest in debt securities of supranational
entities denominated in any currency. 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 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, the fund
will evaluate a country's economic and political conditions such as inflation
rate, growth prospects, global trade patterns and government policies.
Global Government's invests it assets 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 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 30% of the
fund's net assets.
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 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. 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.
NATURAL RESOURCES FUNDS
The following underlying Franklin Templeton funds invest primarily in
securities in the natural resources sector.
FRANKLIN GOLD FUND ("GOLD"). The fund's principal goal is capital
appreciation. Its secondary goal is to provide shareholders with current
income through dividends or interest received from its investments. The fund
will normally invest at least 65% of total assets in equity securities of
companies engaged in gold operations. The fund concentrates (invests more
than 25% of total assets) in companies which mine, process, or deal in gold
or other precious metals, such as silver, platinum, and palladium. The fund
may buy gold companies anywhere in the world and generally invests more than
50% of total assets in companies outside the U.S. The fund invests primarily
in common stocks of companies engaged in gold operations. This includes gold
mining finance companies as well as operating companies with long-, medium-,
or short-life mines.
The fund's manager looks for companies with established records, as well as
companies having low-cost reserves to bring into production. The manager also
considers a company's potential for reserve growth and retention and
production growth.
FRANKLIN NATURAL RESOURCES FUND ("NATURAL RESOURCES"). The investment goal of
the fund 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 tries to achieve its goal by investing at least 65% of its
assets in the equity and debt securities of U.S. and foreign companies in the
natural resources sector.
The fund may also invest up to 35% of its assets outside the natural
resources sector, including in U.S. and foreign equity and debt securities
and REITs.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may buy debt securities that are rated B by Moody's or S&P or better, or
unrated debt that it determines to be of comparable quality. The fund will
not invest more than 15% of its total assets in lower-rated securities (rated
lower than BB by S&P or Ba by Moody's) and unrated securities of comparable
quality. The fund will only buy commercial paper rated A-1 or A-2 by S&P or
Prime-1 or Prime-2 by Moody's, or unrated commercial paper that it determines
to be of comparable quality.
THE NATURAL RESOURCES SECTOR includes companies that own, produce, refine,
process, and market natural resources and companies that provide related
services. The sector includes 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.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills, notes and
bonds, which are direct obligations of the U.S. government, backed by the
full faith and credit of the U.S. Treasury, and in securities issued or
guaranteed by federal agencies. The fund may also invest in securities issued
or guaranteed by foreign governments and their agencies.
AMERICAN DEPOSITARY RECEIPTS. The fund may also invest in American
Depositary Receipts.
GENERAL. The fund may invest up to 10% of its assets in REITs. The fund
expects to invest more of its assets in U.S. securities than in securities of
any other single country, but the fund may invest more than 50% of its total
assets in foreign securities.
WHAT ARE SOME OF THE UNDERLYING FRANKLIN TEMPLETON FUNDS' OTHER INVESTMENT
POLICIES AND PRACTICES?
OPTIONS ON SECURITIES AND SECURITIES INDICES. Certain of the underlying
Franklin Templeton funds may buy and sell options on securities and
securities indices to earn additional income and/or to help protect portfolio
holdings against market and/or exchange rate movements. An option on a
security is a contract that allows the buyer of the option the right to buy
or sell a specific security at a stated price during the option's term. An
option on a securities index is a contract that allows the buyer of the
option the right to receive from the seller cash, in an amount equal to the
difference between the index's closing price and the option's exercise price.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. To help protect portfolio holdings
against adverse changes in foreign currency exchange rates, certain of the
underlying Franklin Templeton fund may (1) buy and sell foreign currency at
the prevailing rate in the foreign currency exchange market; (2) enter into
forward foreign currency contracts which are agreements to buy or sell a
specific currency at a set price on a future date (generally within one
year); (3) buy and sell put and call options on foreign currencies; and (4)
enter into currency swap agreements which are agreements to exchange cash
flows on a notional amount of two or more currencies based on the relative
value differential between them.
FUTURES CONTRACTS. Changes in interest rates, securities prices or foreign
currency valuations may affect the value of an underlying Franklin Templeton
fund's investments. To reduce exposure to these factors, certain of the
underlying Franklin Templeton funds may buy and sell financial futures
contracts, stock index futures contracts, interest rate futures contracts,
foreign currency futures contracts and options on any of these contracts. A
financial futures contract is an agreement to buy or sell a specific security
or commodity at a specified future date and price. An index futures contract
is an agreement to take or make delivery of an amount of cash based on the
difference between the value of the index at the beginning and end of the
contract period. An interest rate futures contract is a contract for the
future delivery of U.S. government securities and index-based futures
contracts, the value of which depend primarily on prevailing interest rates.
A futures contract on a foreign currency is an agreement to buy or sell a
specific amount of a currency for a set price on a future date.
Each of the underlying Franklin Templeton funds limits its futures and
related options activities so that it will not be considered a "commodity
pool operator" under the rules of the Commodity Futures Trading Commission.
In addition, a number of the funds have committed to limit their options and
futures transactions to various percentages. For a further description of
these techniques, see the Appendix and the SAI.
INTEREST RATE SWAPS. Certain of the underlying Franklin Templeton funds 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).
TEMPORARY INVESTMENTS. When a manager of an underlying Franklin Templeton
fund believes that the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist, the manager may invest the fund's portfolio in a
temporary defensive manner. Under such circumstances, the funds typically may
invest up to 100% of their assets in a variety of foreign and domestic debt
securities and instruments, including U.S. government securities, high grade
commercial paper, repurchase agreements, money market securities, bank
obligations and time deposits. Certain underlying Franklin Templeton funds
may also invest temporarily in high risk, lower quality debt securities.
SHORT-TERM INVESTMENTS. A number of the underlying Franklin Templeton funds
may invest cash being held for liquidity purposes in shares of Franklin Money
Fund, other money market funds in the Franklin Templeton Funds or a variety
of U.S. or foreign debt securities or obligations.
REPURCHASE AGREEMENTS. Each underlying Franklin Templeton fund (except
Government Securities) will generally have a portion of its assets in cash or
cash equivalents for a variety of reasons including waiting for a special
investment opportunity or taking a defensive position. To earn income on this
portion of its assets, the fund may enter into repurchase agreements with
certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the Fund in
each repurchase agreement.
For more information about the various types of investments and strategies
employed by the underlying Franklin Templeton funds, please see the Appendix
and the SAI.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors each fund to ensure no material conflicts exist among
the funds' classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. manages each fund's assets and
makes its investment decisions. The manager also performs similar services
for other funds. The manager also provides asset allocation services by
allocating each fund's assets among the underlying Franklin Templeton 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. The
manager or other direct or indirect wholly-owned subsidiaries of Resources
are the investment managers of the underlying Franklin Templeton funds.
Together, the manager and its affiliates manage over $236 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 funds' Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of each
fund's portfolio is Donald P. Gould and Seymour R. Singer since 1996.
Donald P. Gould
Portfolio Manager of Franklin Advisers, Inc.
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 president and portfolio manager of the Franklin Templeton Fund
Allocator Series, and the founder and president of the Franklin Templeton
Global Trust, formerly the Huntington Funds of Pasadena, California. 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 Franklin Advisers, Inc.
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, the manager provides general
advisory services. Such services include monitoring the underlying Franklin
Templeton 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 the manager. The manager also provides asset allocation
advice and administrative services to each fund under the investment advisory
and asset allocation agreement. While the manager 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.
ASSET ALLOCATION FEES. During the fiscal year ended July 31, 1998, asset
allocation fees, before any advance waiver, totaled 0.25% of the average
monthly net assets of each fund. Total direct operating expenses were 1.06%
for Conservative Target Fund - Class I, 1.81% for Conservative Target Fund -
Class II, 0.92% for Moderate Target Fund - Class I, 1.67% for Moderate Target
Fund - Class II, 0.98% for Growth Target Fund - Class I and 1.73% for Growth
Target Fund - Class II. Under an agreement by the manager to waive or limit
its fees, Conservative Target Fund paid no asset allocation fees and Moderate
Target Fund and Growth Target Fund paid asset allocation fees totaling 0.08%
and 0.02%, respectively. Each fund paid direct operating expenses totaling
0.75% for Class I and 1.50% for Class II. The manager has ended this
arrangement for Moderate Target Fund and may end this arrangement at any time
for Conservative Target Fund and Growth Target Fund upon notice to the Board.
Each fund, as a shareholder in the underlying Franklin Templeton funds, will
indirectly bear its proportionate share of any management fees and other
expenses paid by the underlying Franklin Templeton funds. The investment
manager and the management fee of each of the underlying Franklin Templeton
funds are set forth below as an annual percentage rate of such fund's net
assets:
UNDERLYING FRANKLIN
TEMPLETON FUND MANAGER FEE RATE
Equity Franklin Advisers,
Inc. ("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.
("Franklin Mutual")
Discovery Franklin Mutual 0.80%
European Franklin Mutual 0.80%
Short-Intermediate Advisers 0.625%1
Government Securities Advisers 0.625%2
Investment Grade Advisers 0.50%6
AGE Advisers 0.625%1
Templeton Foreign Templeton Global 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%
Hard Currency Advisers; TICI (sub-adviser) 0.65%*
Global Bond TICI 0.50%9
Global Government Advisers; TICI (sub-adviser) 0.625%1,*
Gold Advisers 0.625%1
Natural Resources Advisers 0.625%5
Bond Fund Advisers; TICI (sub-adviser) 0.425%10,*
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.
8 1% of daily net assets up to $100 million, .90% of daily net assets over
$100 million up to $250 million, .80% of daily net assets over $250 million
up to $500 million, and .75% of daily net assets over $500 million.
9 .50% of its average daily net assets, .45% of such net assets in excess of
$200 million and .40% of such net assets in excess of $1.3 billion.
10 .425% of the value of its average daily net assets up to and including
$500 million; .325% of the value of its average daily net assets over $500
million up to and including $1 billion; and .280% of the value of its average
daily net assets over $1 billion up to and including $1.5 billion; and .235%
of the value of its average daily net assets over $1.5 billion up to and
including $6.5 billion; .215% of the value of its average daily net assets
over $6.5 billion up to and including $11.5 billion; and .200% of the value
of its average daily net assets over $11.5 billion up to and including $16.5
billion; and .190% of the value of its average daily net assets over $16.5
billion up to and including $19 billion; .180% of the value of its average
daily net assets over $19 billion up to and including $21.5 billion; and
.170% of the value of its average daily net assets over $21.5 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 Franklin Templeton 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, 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. As to Bond Fund, TICI receives 25% of the investment advisory fee
paid to Advisers by the fund.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager 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
Do the Funds Buy Securities for Their Portfolios?" 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.
YEAR 2000 ISSUE. Like other mutual funds, the funds could be adversely
affected if the computer systems used by the manager and other service
providers do not properly process date-related information on or after
January 1, 2000 ("Year 2000 Issue"). The Year 2000 Issue, and in particular
foreign service providers' responsiveness to the issue, could affect
portfolio and operational areas including securities trade processing,
interest and dividend payments, securities pricing, shareholder account
services, reporting, custody functions, and others. While there can be no
assurance that the funds will not be adversely affected, the manager and its
affiliated service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Issue, including seeking
reasonable assurances from the funds' other major service providers.
THE RULE 12B-1 PLANS
Each fund and class 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 funds under their 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, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class II plans, a 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, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
A fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under its 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
Funds' Underwriter" in the SAI.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
----------------------------------------
TAXATION OF THE FUNDS' INVESTMENTS. A HOW DO THE FUNDS EARN INCOME AND GAINS?
fund invests your money in the A fund earns dividends and interest (a
underlying Franklin Templeton funds fund's "income") on its investments.
and other securities that are When a fund sells a security for a
described in the section "How Do the price that is higher than it paid, it
Funds Invest Their Assets?" Special has a gain. When a fund sells a
tax rules may apply when determining security for a price that is lower than
the income and gains that a fund earns it paid, it has a loss. If a fund has
on its investments. These rules may, held the security for more than one
in turn, affect the amount of year, the gain or loss will be a
distributions that a fund pays to long-term capital gain or loss. If a
you. These special tax rules are fund has held the security for one year
discussed in the SAI. or less, the gain or loss will be a
short-term capital gain or loss. A
TAXATION OF THE FUNDS. As a regulated fund may also receive capital gain
investment company, a fund generally distributions from the underlying
pays no federal income tax on the Franklin Templeton funds and realize
income and gains that it distributes capital gains upon the redemption of
to you. shares of the underlying Franklin
Templeton funds. A fund's gains and
losses are netted together, and, if a
fund has a net gain (a fund's "gains"),
that gain will generally be distributed
to you.
----------------------------------------
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains
from the underlying Franklin Templeton fund's investments in foreign stocks and
bonds. These taxes will reduce the amount a fund distributes to you.
TAXATION OF SHAREHOLDERS
----------------------------------------
DISTRIBUTIONS. Distributions from a WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash As a shareholder, you will receive your
or in additional shares, are generally share of a fund's income and gains on
subject to income tax. A fund will its investments in the underlying
send you a statement in January of the Franklin Templeton funds and other
current year that reflects the amount securities. A fund's income and short
of ordinary dividends, capital gain term capital gains are paid to you as
distributions and non-taxable ordinary dividends. A fund's long-term
distributions you received from the capital gains are paid to you as
fund in the prior year. This capital gain distributions. If a fund
statement will include distributions pays you an amount in excess of its
declared in December and paid to you income and gains, this excess will
in January of the current year, but generally be treated as a non-taxable
which are taxable as if paid on distribution. These amounts, taken
December 31 of the prior year. The together, are what we call a fund's
IRS requires you to report these distributions to you.
amounts on your income tax return for
the prior year.
----------------------------------------
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Special rules apply to payouts from Roth and Education
IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they
receive from a fund.
----------------------------------------
REDEMPTIONS AND EXCHANGES. If you WHAT IS A REDEMPTION?
redeem your shares or if you exchange A redemption is a sale by you to a fund
your shares in a fund for shares in of some or all of your shares in the
another Franklin Templeton Fund, you fund. The price per share you receive
will generally have a gain or loss when you redeem fund shares may be more
that the IRS requires you to report on or less than the price at which you
your income tax return. If you purchased those shares. An exchange of
exchange fund shares held for 90 days shares in a fund for shares of another
or less and pay no sales charge, or a Franklin Templeton Fund is treated as a
reduced sales charge, for the new redemption of fund shares and then a
shares, all or a portion of the sales purchase of shares of the other fund.
charge you paid on the purchase of the When you redeem or exchange your
shares you exchanged is not included shares, you will generally have a gain
in their cost for purposes of or loss, depending upon whether the
computing gain or loss on the amount you receive for your shares is
exchange. If you hold your shares for more or less than your cost or other
six months or less, any loss you have basis in the shares. Please call Fund
will be treated as a long-term capital Information for a free Tax Information
loss to the extent of any capital gain Handbook if you need more information
distributions received by you from a on calculating the gain or loss on the
fund. All or a portion of any loss on redemption or exchange of your shares.
the redemption or exchange of your ----------------------------------------
shares will be disallowed by the IRS
if you buy other shares in a fund
within 30 days before or after your
redemption or exchange.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from redemptions or exchanges of
your fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax advisor to
determine the U.S. and non-U.S. tax consequences of your investment in a fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from a fund, and gains arising from redemptions or exchanges of your
fund shares will generally be subject to state and local income tax. It is
anticipated that no portion of a fund's distributions will qualify for the
exemption from state and local income tax as dividends paid from interest
earned on direct obligations of the U.S. government. The holding of fund
shares may also be subject to state and local intangibles taxes. You may wish
to contact your tax advisor to determine the state and local tax consequences
of your investment in a fund.
----------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that Backup withholding occurs when a fund
you provide your taxpayer is required to withhold and pay over to
identification number ("TIN"), certify the IRS 31% of your distributions and
that it is correct, and certify that redemption proceeds. You can avoid
you are not subject to backup backup withholding by providing a fund
withholding under IRS rules. If you with your TIN, and by completing the
fail to provide a correct TIN or the tax certifications on your shareholder
proper tax certifications, the IRS application that you were asked to sign
requires a fund to withhold 31% of all when you opened your account. However,
taxable distributions (including if the IRS instructs a fund to begin
ordinary dividends and capital gain backup withholding, it is required to
distributions), and redemption do so even if you provided the fund
proceeds paid to you. A fund is also with your TIN and these tax
required to begin backup withholding certifications, and backup withholding
on your account if the IRS instructs will remain in place until the fund is
the fund to do so. A fund reserves the instructed by the IRS that it is no
right not to open your account, or, longer required.
alternatively, to redeem your shares ----------------------------------------
at the current Net Asset Value, less
any taxes withheld, if you fail to
provide a correct TIN, fail to provide
the proper tax certifications, or the
IRS instructs the fund to begin backup
withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX TREATMENT TO YOU
OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID AND INCOME TAXES
WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX INFORMATION
HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND INFORMATION.
HOW IS THE TRUST ORGANIZED?
The funds are series of Franklin Templeton Fund Allocator Series (the
"Trust"), 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, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum
investments are:
o To open a regular, non-retirement account $1,000
o To open an IRA, IRA Rollover, Roth IRA,
or Education IRA $ 250*
o To open a custodial account for a minor
(an UGMA/UTMA account) $ 100
o To open an account with an automatic
investment plan $ 50**
o To add to an account $ 50***
*For all other retirement accounts, there is no minimum investment requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to time
or to waive or lower these minimums for certain purchases. We also reserve
the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. Please also
indicate which class of shares you want to buy. If you do not specify a
class, we will automatically invest your purchase in Class I shares. It
is important that we receive a signed application since we will not be
able to process any redemptions from your account until we receive your
signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to receive
a wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the fund.
IMPORTANT DEADLINES: If we receive your call
before 1:00 p.m. Pacific time and the bank
receives the wired funds and reports the receipt
of wired funds to the fund by 3:00 p.m. Pacific
time, we will credit the purchase to your account
that day. If we receive your call after 1:00 p.m.
or the bank receives the wire after 3:00 p.m., we
will credit the purchase to your account the
following business day.
THROUGH YOUR DEALER Call your investment representative
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
- --------------------------------------------------------------------------------
o Higher front-end sales charges than o Lower front-end sales charges
Class II shares. There are several than Class I shares
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 on o Contingent Deferred Sales Charge
purchases of $1 million or more sold on purchases sold within 18 months
within one year
o Lower annual expenses than Class II o Higher annual expenses than
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
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $50,000 5.75% 6.10% 5.00%
$50,000 but less than 4.50% 4.71% 3.75%
$100,000
$100,000 but less than 3.50% 3.63% 2.80%
$250,000
$250,000 but less than 2.50% 2.56% 2.00%
$500,000
$500,000 but less than 2.00% 2.04% 1.60%
$1,000,000
$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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank
CD or a Franklin Templeton money fund, you may reinvest them as
described above. The proceeds must be reinvested within 365 days from
the date the CD matures, including any rollover, or the date you redeem
your money fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy 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 the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
7. 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. The minimum
initial investment is $250.
4. Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors
5. Registered Securities Dealers and their affiliates, for their
investment accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. 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. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class I shares without a front-end sales
charge. Retirement plans that are not Qualified Retirement Plans, SIMPLEs or
SEPs must also meet the requirements described under "Group Purchases - Class
I Only" above to be able to buy Class I shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated 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.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
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 goal
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
- --------------------------------------------------------------------------------
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 the difference is more than 0.25%. 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.
CONTINGENT DEFERRED 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.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge 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. If you exchange your Class II shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares
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 funds, such as "Advisor Class" or "Class Z" shares. Because
the funds do not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class I shares of a 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 a 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 funds nor their 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 until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
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 is
transferred out of the Franklin Templeton Funds or terminated 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 a 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 IRAs due to death or disability or upon periodic
distributions based on life expectancy
o 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 FUNDS DO NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR 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 a fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
fund (without a sales charge 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 or savings account, you may need a
signature guarantee. If you send the money to a checking or savings account,
please see "Electronic Fund Transfers" under "Services to Help You Manage
Your Account."
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 funds are open for business each day the NYSE is open. We determine the
Net Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price 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.
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.
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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
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TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
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STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50
for employee accounts and custodial accounts for minors. 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 $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to IRAs and other retirement plan
accounts or to accounts managed by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in a fund.
Under the plan, you can have money transferred automatically from your
checking or savings 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 a 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
calling Shareholder Services.
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 or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. Once your plan is established, any distributions paid
by the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
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
----------------------------
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 funds 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 funds' 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 funds 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 funds, Distributors and the manager are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement 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
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. The holding period begins on the day you buy
your shares. For example, if you buy shares on the 18th of the month, they
will age one month on the 18th day of the next month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DEPOSITARY RECEIPTS - are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the funds' 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., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
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.
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 5.75% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
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, STRATEGIES AND RISKS OF THE
UNDERLYING FRANKLIN TEMPLETON FUNDS?
BORROWING. As a fundamental investment restriction, the underlying Franklin
Templeton funds (except Value, Mutual Shares, Discovery, European, Developing
Markets, Global Bond, Greater European and Latin America) may not borrow
money except for temporary or emergency purposes, up to the following
amounts: 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
and Bond Fund - 30% of total assets; Natural Resources - 33% of total assets;
and Hard Currency - 331/3% of total assets.
Value, Developing Markets, Greater European and Latin America 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, Discovery and European 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. A convertible security is generally a preferred stock or debt
security that may be converted within a specified period of time into a
certain amount of common stock or other equity securities of the same or a
different issuer. Convertible securities also include non-convertible debt
securities with warrants or stock or stock index options attached ("synthetic
convertible securities"). A convertible security entitles the holder to
receive interest paid or accrued on debt securities or dividends paid or
accrued on preferred stock until the security matures or is redeemed,
converted or exchanged. If a convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank. Convertible securities generally offer income yields that
are higher than the dividend yield, if any, of the underlying common stock,
but lower than the yield of similar non-convertible debt securities. While
the underlying Franklin Templeton funds generally use the same criteria to
rate a convertible debt security that they use to rate a more conventional
debt security, a convertible preferred stock is treated like a preferred
stock for financial reporting, credit rating, and investment limitation
purposes.
A convertible security has risk characteristics of both equity and debt
securities. Its value may rise and fall with the market value of the
underlying stock or, like a debt security, vary with changes in interest
rates and the credit quality of the issuer. A convertible security tends to
perform more like a stock when the underlying stock price is high (because it
is assumed it will be converted) and more like a debt security when the
underlying stock price is low (because it is assumed it will not be
converted). Because its value can be influenced by many different factors, a
convertible security is not as sensitive to interest rate changes as a
similar non-convertible debt security, and generally has less potential for
gain or loss than the 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 Franklin Templeton funds. A 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 fund's ability to dispose
of particular securities, when necessary, to meet its 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
Franklin Templeton 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.
DEBT SECURITIES. Debt securities are securities issued by a company which
represent a loan of money by the purchaser of the securities to the company.
A debt security typically has a fixed payment schedule which obligates the
company to pay interest to the lender and to return the lender's money over a
certain time period. A company typically meets its payment obligations
associated with its outstanding debt securities before it declares and pays
any dividends to holders of its equity securities. While debt securities are
typically used as an investment to produce income to an investor as a result
of the fixed payment schedule, debt securities may also increase or decrease
in value depending upon factors such as interest rate movements and the
success or lack of success of a company.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
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 Franklin Templeton
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 Franklin Templeton 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 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 Franklin Templeton 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).
EQUITY SECURITIES. Equity securities are securities which entitle the holder
to participate in a company's general operating success or failure. The
purchaser of an equity security typically receives an ownership interest in
the company as well as certain voting rights. The owner of an equity security
may participate in a company's success through the receipt of dividends which
are distributions of earnings by the company to its owners. Equity security
owners may also participate in a company's success or lack of success through
increases or decreases in the value of the company's shares as traded in the
public trading market for such shares. The public trading market for such
shares is typically a stock exchange but can also be a market which arises
between broker-dealers seeking buyers and sellers of a particular security.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well.
Euro. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. If a fund holds investments in
countries with currencies replaced by the Euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the Euro may result in market volatility. For the same
reason it is not possible to predict the impact of the Euro on the business
or financial condition of European issuers or on a fund. To the extent a fund
holds non-U.S. dollar (Euro or other) denominated securities, it will still
be exposed to currency risk due to fluctuations in those currencies versus
the U.S. dollar.
FOREIGN CURRENCY FLUCTUATIONS. Because certain of the underlying Franklin
Templeton 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 Franklin Templeton 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.
FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS. Equity, Small Cap, Pacific
Growth, Foreign Smaller, Natural Resources, Mutual Shares, Discovery,
European, Developing Markets, Greater European, Latin America, Global Bond,
Bond Fund, 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.
FOREIGN CURRENCY OPTIONS. AGE, Pacific Growth, Foreign Smaller, Natural
Resources, Mutual Shares, Discovery, European, Greater European, Latin
America, 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.
FOREIGN CURRENCY SWAPS. Mutual Shares, Discovery and European 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.
FOREIGN CURRENCY TRANSACTION RISKS. 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.
FORWARD CURRENCY EXCHANGE CONTRACTS. AGE, Mutual Shares, Discovery, European,
Pacific Growth, Foreign Smaller, Natural Resources, Hard Currency, Global
Bond, Bond Fund, Global Government, Greater European, Latin America,
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 and
Latin America 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 and Latin America 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.
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. An investment in an underlying Franklin
Templeton 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 Franklin Templeton fund's portfolio defaults, the underlying
Franklin Templeton 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 Franklin Templeton
fund's Net Asset Value may be adversely affected before an issuer defaults.
In addition, the underlying Franklin Templeton fund may incur additional
expenses if it must try to recover principal or interest payments on a
defaulted security.
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
Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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, Bond Fund, 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, Bond Fund, 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 Franklin Templeton 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, 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. Bond Fund, Natural Resources, Mutual Shares, Discovery,
European, Greater European and Latin America may invest up to 15% of their
respective total assets in illiquid securities.
INTEREST RATE FUTURES AND OPTIONS. Value, Pacific Growth, Foreign Smaller,
Mutual Shares, Discovery, European, Global Government, Bond Fund 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.
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.
AGE and Global Government may participate in interest rate swaps. 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.
INVESTMENT COMPANY SECURITIES. Certain of the underlying Franklin Templeton
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.
LOAN PARTICIPATIONS. AGE, Value, Mutual Shares, Discovery, European 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, Discovery and European, 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, Bond Fund, Short-Intermediate, Investment
Grade, AGE, Mutual Shares, Discovery, European, Greater European, Developing
Markets, Latin America, 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, and Hard
Currency's total assets, 33% of Natural Resources' total assets and, 33 1/3%
of Bond Fund's, Greater European's, Pacific Growth's, Foreign Smaller's,
Latin America's, Global Bond's and Developing Markets' total assets.
Investment Grade, Mutual Shares, Discovery and European 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 and Latin America 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 securities represent an ownership interest
in mortgage loans made by banks and other financial institutions to finance
purchases of homes, commercial buildings or other real estate. These mortgage
loans may have either fixed or adjustable interest rates. The individual
mortgage loans are packaged or "pooled" together for sale to investors. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments. Mortgage-backed securities are issued by U.S. government
agencies, foreign government agencies, and private institutions. The payment
of interest and principal on securities issued by U.S. government agencies
generally is guaranteed either by the full faith and credit of the U.S.
government or by the credit of the agency. The guarantee applies only to the
timely repayment of principal and interest and not to the market prices and
yields of the securities or to the Net Asset Value or performance of the
fund, which will vary with changes in interest rates and other market
conditions. Mortgage-backed securities issued by foreign government agencies
and private institutions are not guaranteed by the U.S. government or its
agencies.
A mortgage-backed security differs from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans.
During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at
lower rates. The fund may be forced to reinvest returned principal at lower
interest rates, reducing the fund's income. For this reason, mortgage-backed
securities may be less effective than other types of securities as a means of
"locking in" long-term interest rates and may have less potential for capital
appreciation during periods of falling interest rates than other investments
with similar maturities. A reduction in the anticipated rate of principal
prepayments, especially during periods of rising interest rates, may increase
the effective maturity of mortgage-backed securities, making them more
susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase the volatility of the fund's returns
and share price.
CMOs may be issued or guaranteed by U.S. government agencies or issued by
certain financial institutions and other mortgage lenders. CMOs and REMICs
are debt instruments issued by special purpose entities and are secured by
pools of mortgages backed by residential and various types of commercial
properties. Multi-class pass-through securities are equity interests in a
trust composed of mortgage loans or other mortgage-backed securities.
Payments of principal and interest on the underlying collateral provides the
funds to pay debt service on the CMO or REMIC or make scheduled distributions
on the multi-class pass-through securities.
CMOs are collateralized by pools of mortgage loans created by commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other issuers in the U.S. Timely payment of interest and
principal (but not the market value and yield) of some of these pools is
supported by various forms of insurance or guarantees issued by private
issuers, those who pool the mortgage assets and, in some cases, by U.S.
government agencies. Prepayments of the mortgages underlying a CMO, which
usually increase when interest rates decrease, will generally reduce the life
of the mortgage pool, thus impacting the CMO's yield. Under these
circumstances, the reinvestment of prepayments will generally be at a rate
lower than the rate applicable to the original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a
specified coupon rate or adjustable rate and has a stated maturity or final
distribution date. Principal prepayments on collateral underlying a CMO,
however, may cause it to be retired substantially earlier than the stated
maturities or final distribution dates. Interest is paid or accrues on all
classes of a CMO on a monthly, quarterly or semiannual basis. The principal
and interest on the underlying mortgages may be allocated among several
classes of a series in many ways. In a common structure, payments of
principal, including any principal prepayments, on the underlying mortgages
are applied to the classes of a series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment
of principal will be made on any class of a CMO until all other classes
having an earlier stated maturity or final distribution date have been paid
in full.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured
by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. As with CMOs, the mortgages that
collateralize the REMICs in which the fund may invest include mortgages
backed by GNMAs or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities or issued by private
entities, which are not guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields
on CMOs issued or guaranteed by U.S. government agencies. However, the risk
of loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government.
Asset-backed securities are securities backed by credit card eceivables,
automobile, mobile home and recreational vehicle loans and leases, and other
receivables. 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.
NATURAL RESOURCES SECTOR RISKS. There are a number of risks associated with
investing in the natural resources sector, including gold. The securities of
companies in the natural resources sector may experience more price
volatility than securities of companies in other industries. Some of the
commodities in these industries are subject to limited pricing flexibility
because of supply and demand factors. Others are subject to more broad price
fluctuations as a result of volatility of the prices for certain raw
materials' prices and the instability of supplies of other materials. These
factors can affect the profitability of companies in the natural resources
sector and, as a result, the value of their securities.
Gold operation companies involve special considerations. Prices of their
securities will be affected by the price of gold and precious metals. They
may also be affected by changing costs of production. The price of gold may
fluctuate substantially over short periods of time so the fund's share price
may be more volatile than other types of investments.
The price of gold and other precious metals is affected by several factors
including (1) how much of the worldwide supply of gold is held among four
major producers. Economic, political, or other conditions affecting one of
the major sources could have a substantial effect on the world's gold supply
in countries throughout the world; (2) increased environmental, labor or
other costs in mining; (3) changes in laws relating to mining or gold
production or sales; and (4) unpredictable monetary policies and economic and
political conditions in countries throughout the world. For example, if
Russia decides to sell some of its gold reserves, the supply would go up, and
the price would generally go down.
In addition, changes in U.S. or foreign tax, currency or mining laws may make
it more expensive and/or more difficult to pursue the fund's investment
strategies.
The value of a company may be affected by factors that affect the company
alone, the industry, or the entire country in which it is located.
Because of current conditions in South Africa, Gold's investments in South
African companies, approximately 20% of the portfolio as of July 31, 1998,
may be subject to somewhat greater risk than investments in companies of
countries with more stable political profiles.
NEW OR UNSEASONED COMPANIES. Certain of the underlying Franklin Templeton
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.
OPTIONS AND FINANCIAL FUTURES. Certain of the underlying Franklin Templeton
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,
European, Pacific Growth, Foreign Smaller, Global Government, Global Bond,
Latin America, 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 and Latin
America 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.
Mutual Shares', Discovery's and European'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, Discovery or European may not
purchase or sell put options on futures on individual corporate debt and
individual equity securities.
Bond Fund may buy and sell financial futures contracts and foreign currency
futures contracts and options on these contracts. Under ordinary
circumstances, the fund does not expect that it will invest more than 10% of
total assets in futures and related options contracts; however, during the
fund's initial period of operations it is anticipated that the fund's
investments in these contracts will not exceed 25% of total assets.
The options and futures transactions of many of the underlying Franklin
Templeton 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, Discovery and
European 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 may buy and sell financial futures contracts, stock
index futures contracts, foreign currency futures contracts and options on
any of the foregoing.
The futures activities of each of the underlying Franklin Templeton funds
will be accomplished so that no fund is considered to be a commodity pool
operator under the laws governing the trading of commodities. All futures and
related options activities of the funds are limited to bona fide hedging
transactions, or, if not for bona fide hedging purposes, the aggregate
initial margin premiums required to establish its futures or related options
positions may not exceed 5% of the underlying Franklin Templeton 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, certain of underlying
Franklin Templeton funds have committed to limit their options and futures
transactions to various percentages.
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 Franklin Templeton 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 a situation, the underlying Franklin Templeton fund
will likely be unable to control losses by closing its position.
For a further description of these techniques, see the SAI.
PUBLIC UTILITIES SECURITIES. The risks of investments in the public utilities
industry include: risks associated with regulatory changes (including
deregulation); 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.
REIT AND REAL ESTATE-RELATED RISKS. REITs typically invest directly in real
estate and/or in mortgages and loans collateralized by real estate. "Equity"
REITs are real estate companies that own and manage income-producing
properties such as apartments, hotels, shopping centers or office buildings.
The income, primarily rent from these properties, is generally passed on to
investors in the form of dividends. These companies provide experienced
property management and generally concentrate on a specific geographic region
or property type. "Mortgage" REITs make loans to commercial real estate
developers and earn income from interest payments.
To the extent an underlying Franklin Templeton invests in REITs or securities
of companies operating in the real estate industry, it generally is subject
to the same risks that affect direct investments in real estate and its
performance is closely tied to conditions affecting the real estate industry.
Real estate values rise and fall in response to a variety of factors,
including local, regional and national economic conditions, the strength of
specific industries renting properties, and other factors affecting supply
and demand for properties. When economic growth is slowing, demand for
property decreases and prices may decline. Rising interest rates, which drive
up mortgage and financing costs, can restrain construction and buying and
selling activity and make other investments more attractive. Property values
could decrease because of overbuilding, increases in property taxes and
operating expenses, changes in zoning laws, environmental regulations or
hazards, uninsured casualty or condemnation losses, or a general decline in
neighborhood values.
The value of securities of companies that service the real estate industry
will also be affected by changes affecting the real estate market.
REITs. Changes in the market value of an underlying Franklin Templeton fund's
investments in REIT securities will also affect its performance. A REIT's
performance depends on the types and locations of the properties it owns and
on how well it manages those properties. A decline in rental income could
occur because of extended vacancies, increased competition from other
properties, tenants' failure to pay rent or poor management. A REIT's
performance also depends on the company's ability to finance property
purchases and renovations and manage its cash flows. Mortgage REITs are
subject to the risks that the borrower may be unable to make interest and
principal payments on the loan made by the mortgage REIT and that the value
of the property may be less than the amount of the loan. Because REITs
typically are invested in a limited number of projects or in a particular
market segment, they are more susceptible to adverse developments affecting a
single project or market segment than more broadly diversified investments.
Loss of status as a qualified REIT or changes in the treatment of REITs under
the Code could adversely affect the value of a particular REIT or the market
for REITs as a whole and the underlying Franklin Templeton fund's performance.
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.
Equity, Developing Markets, AGE, Small Cap, Mutual Shares, Discovery,
European, Natural Resources, Smaller Companies, Foreign, Greater European,
Pacific Growth, Foreign Smaller, Global Bond, Real Estate and Latin America
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.
RESTRICTED SECURITIES. Certain of the underlying Franklin Templeton 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. 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.
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, Discovery and European may make short sales up to 5% of their
respective total net assets, and may sell securities "short against the box"
without limit. Bond Fund may also make short sales.
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, Greater European, Latin America and Bond Fund 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.
TRADE CLAIMS. AGE, Value, Mutual Shares, Discovery and European 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, 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. 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, generally within 30 to 60 days.
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, European, Smaller Companies, Templeton Foreign,
Greater European, Latin America, Global Bond, Bond Fund, 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 high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
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 these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating 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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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.
The relative degree of safety, however, 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.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
FRANKLIN TEMPLETON MODERATE TARGET FUND
FRANKLIN TEMPLETON GROWTH TARGET FUND
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 1, 1998
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Do the Funds Invest Their Assets?........................
What Are the Risks of Investing in the Funds?................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Advisory, Asset
Allocation and Other Services...............................
How Do the Funds Buy
Securities for Their Portfolios?............................
How Do I Buy, Sell and Exchange Shares?......................
How Are Fund Shares Valued?..................................
Additional Information on
Distributions and Taxes.....................................
The Funds' Underwriter.......................................
How Do the Funds Measure Performance?........................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix.....................................................
Description of Ratings......................................
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When reading this SAI, you will see certain terms beginning with
capital letters. This means the term is explained under "Useful
Terms and Definitions."
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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. The investment goal of each fund is the
highest level of long-term total return that is consistent with an acceptable
level of risk.
The Prospectus, dated December 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in a fund.
For a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF EACH
FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
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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
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HOW DO THE FUNDS INVEST THEIR ASSETS?
As described in the Prospectus, each fund pursues its investment goal by
investing primarily in a combination of Franklin Templeton funds ("underlying
Franklin Templeton funds"). Each fund may also invest its assets directly in the
types of securities in which the underlying Franklin Templeton funds invest and
may engage directly in the types of investment strategies in which the
underlying Franklin Templeton 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 sections in the Prospectus entitled "How Do the Funds Invest Their Assets?";
"What Are the Risks of Investing in the Funds?"; "What Are the Risks of
Investing in the Underlying Franklin Templeton Funds?"; "How Do the Underlying
Franklin Templeton Funds Invest Their Assets?"; and "What Are Some of the Other
Investment Policies, Strategies and Risks of the Underlying Franklin Templeton
Funds?"
OPTIONS ON SECURITIES AND SECURITIES INDICES
CALL AND PUT OPTIONS ON SECURITIES. Certain underlying Franklin Templeton funds
may write covered put and call options and purchase put and call options that
are listed on domestic or foreign securities exchanges or traded in the
over-the-counter market.
WRITING CALL AND PUT OPTIONS. A call option gives the option holder the right to
buy the underlying securities from the option writer at a stated exercise price.
A put option gives the option holder the right to sell the underlying security
at the option exercise price at any time during the option period.
A call option written by an underlying Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton
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 Franklin Templeton funds may
engage in forward conversions. In a forward conversion, the underlying Franklin
Templeton 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 Franklin Templeton 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 Franklin
Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton
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
Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton funds or
which are not currently available but that may be developed, to the extent such
opportunities are both consistent with the underlying Franklin Templeton fund's
investment objectives and legally permissible for the fund.
CURRENCY TRANSACTIONS
Certain of the underlying Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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
Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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
Franklin Templeton funds may write covered put and call options and purchase put
and call options on foreign currencies. The underlying Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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.
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 Franklin
Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 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
Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton 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
Franklin Templeton 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 Franklin Templeton 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 a fund or (ii) 67% or
more of the shares of a fund present at a shareholder meeting if more than 50%
of the outstanding shares of a 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 Franklin
Templeton 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 Franklin Templeton 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 Franklin Templeton fund, (ii)
invest more than 5% of its assets in any one underlying Franklin Templeton fund
and (iii) invest substantially all of its assets in the underlying Franklin
Templeton funds.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of each fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of each fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of
each fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Director, General Host Corporation (nursery and
craft centers).
Edith E. Holiday (46)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (crude oil and natural gas refining)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (packaged foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, General Host Corporation (nursery and craft
centers).
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission Systems,
Inc. (wireless communications); director or trustee, as the case may be, of 27
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems) and
General Partner, Peregrine Associates, which was the General Partner of
Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of 49
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and Hambrecht
and Quist Group (investment banking), and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., 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 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 53 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal Officer
and Chief Operating Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Donald P. Gould (40)
777 Mariners Island Blvd.
San Mateo, CA 94404
President
Managing Director, Templeton Worldwide, Inc.; Portfolio Manager, Franklin
Advisers, Inc.; and officer and/or trustee of two of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, officer and trustee of
Huntington Funds, President and Director of Huntington Advisers, Inc. (a mutual
fund investment adviser), and President of Huntington Investments, Inc. (a
mutual fund underwriter).
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and the manager. As of June 1, 1998, nonaffiliated members of the
Board are paid $130 per quarter plus $110 per meeting attended. 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 fees payable to nonaffiliated
Board members by the Trust are subject to reductions resulting from fee caps
limiting the amount of fees payable to Board members who serve on other boards
within the Franklin Templeton Group of Funds. The following table provides the
total fees paid to nonaffiliated Board members by the Trust and by other funds
in the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
TOTAL FEES FRANKLIN
RECEIVED FROM TEMPLETON GROUP
TOTAL FEES THE FRANKLIN OF FUNDS ON
RECEIVED FROM TEMPLETON GROUP WHICH EACH
NAME THE TRUST*** OF FUNDS**** SERVES*****
Frank H. Abbott, III $182 $165,937 27
Harris J. Ashton 190 344,642 49
S. Joseph Fortunato 177 361,562 51
David Garbellano* N/A 91,317 N/A
Edith E. Holiday** 240 72,875 25
Frank W.T. LaHaye 182 141,433 27
Gordon S. Macklin 190 337,292 49
*Deceased, September 27, 1997.
**Appointed, February 26, 1998.
***For the fiscal year ended July 31, 1998. During the period from August 1,
1997, through May 31, 1998, nonaffiliated members of the Board were not paid
fees.
****For the calendar year ended December 31, 1997.
*****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 170 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the funds 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 September 11, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the funds: approximately 8,965
shares of Moderate Target Fund - Class I and 2,586 shares of Growth Target Fund
- - Class I, or less than 1% of the total outstanding shares of each of these
funds. 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. Each fund's investment manager is
Franklin Advisers, Inc. Pursuant to the investment advisory and asset allocation
agreement with the fund, the manager will determine how each fund's assets will
be invested pursuant to the investment objectives and policies of the fund. The
manager 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 Franklin Templeton funds in which the fund may invest, and (c) the
percentage of assets that may be invested by each fund in any one underlying
Franklin Templeton fund. To the extent that the funds invest directly in
securities and engage directly in various investment practices, the manager
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 each fund's portfolio transactions are executed. The
manager's activities are subject to the review and supervision of the Board to
whom the manager renders periodic reports of each fund's investment activities.
The manager and its officers, directors and employees are covered by fidelity
insurance for the protection of each fund.
The manager and its affiliates act as investment manager to numerous other
investment companies and accounts. The manager may give advice and take action
with respect to any of the other funds it manages, or for its own account, that
may differ from action taken by the manager on behalf of each fund. Similarly,
with respect to each fund, the manager is not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that the
manager and access persons, as defined by the 1940 Act, may buy or sell for its
or their own account or for the accounts of any other fund. The manager is not
obligated to refrain from investing in securities held by the funds or other
funds that it manages. Of course, any transactions for the accounts of the
manager and other access persons will be made in compliance with the funds' Code
of Ethics. Please see "Miscellaneous Information - Summary of Code of Ethics."
The manager 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, 1998, fees for asset allocation services,
before any advance waiver, totaled $31,017 for the Conservative Target Fund,
$62,386 for the Moderate Target Fund and $76,453 for the Growth Target Fund.
Under an agreement by the manager to limit its fees, the Conservative Target
Fund paid no asset allocation fees and the Moderate Target Fund and Growth
Target Fund paid asset allocation fees of $18,841 and $5,952, respectively. 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 the manager 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, 1999. 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 the manager or by the manager 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 each 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 funds' shareholder servicing agent and acts as the funds'
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. Each 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 Franklin Templeton funds, effectively acts as the fund's custodian
and holds the fund's shares of the underlying Franklin Templeton 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 Franklin Templeton funds, as well as other securities
and other assets of each fund. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
AUDITOR. PricewaterhouseCoopers LLP, 333 Market Street, San Francisco,
California 94105, is the funds' independent auditor. During the fiscal year
ended July 31, 1998, the auditor's 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, 1998.
HOW DO THE FUNDS BUY SECURITIES FOR THEIR PORTFOLIOS?
Orders for the purchase and sale of shares of the underlying Franklin Templeton
funds will be placed directly with Distributors, which also acts as principal
underwriter for shares of the underlying Franklin Templeton funds.
The manager selects brokers and dealers to execute the funds' 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 Franklin Templeton funds, the
manager 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 the manager 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. The manager 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 the manager, a better price and
execution can otherwise be obtained. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager 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 the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
Since most purchase by a fund are principal transactions at net prices, the
funds incur 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 funds seek to obtain prompt execution
of orders at the most favorable net price. Transactions may be directed to
dealers in return for research and statistical information, as well as for
special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the funds'
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 a fund, any
portfolio securities tendered by the fund will be tendered through Distributors
if it is legally permissible to do so. In turn, the next management fee payable
to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as a fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the fiscal years ended July 31, 1998 and 1997, the funds paid no
brokerage commissions on transactions allocated to brokers.
As of July 31, 1998, 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 funds continuously offer their 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.
Banks and financial institutions that sell shares of the funds 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 funds'
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.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
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 the amount of your total purchases, less
redemptions, equals 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 the amount of your total purchases, less redemptions, exceeds 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 amount of your total purchases, less
redemptions, is 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
each 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 each fund's investment goal 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
Net Asset Value at the close of business on the day the request for exchange is
received in proper form. Please see "May I Exchange Shares for Shares of Another
Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. Each 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 funds do 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 funds 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 funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a 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 funds on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, a fund may reimburse Investor Services
an amount not to exceed the per account fee that the fund normally pays Investor
Services. These financial institutions may also charge a fee for their services
directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE, normally
1:00 p.m. Pacific time, each day that the NYSE is open for trading. As of the
date of this SAI, the funds are 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 each 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 Franklin Templeton 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 the manager.
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 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 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 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
funds may use a pricing service, bank or Securities Dealer to perform any of the
above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The underlying Franklin Templeton 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 Franklin Templeton
fund's operation, is the net investment income from which income dividends may
be paid to a fund. This income of a fund together with any income on direct
investments made by a fund (net of any direct expenses of a fund), constitutes
its net investment income from which distributions may be paid to you.
DISTRIBUTIONS OF CAPITAL GAINS. The underlying Franklin Templeton funds may
derive capital gains or losses in connection with sales or other dispositions of
their portfolio securities. To the extent that an underlying Franklin Templeton
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, a 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 Franklin Templeton fund earns a net capital
gain (an excess of net long-term capital gain over net short-term capital loss),
a fund's respective portion of that gain will be distributed to the fund as a
capital gain dividend, and will become part of the fund's long-term capital
gain, together with any long-term gains realized by the fund on redemption of
shares of the underlying Franklin Templeton funds. 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-term gains realized by a fund on redemption of the shares of
the underlying Franklin Templeton funds, when distributed to you will be taxable
as ordinary income.
Distributions paid from long-term capital gains will be taxable to you as
long-term capital gain regardless of how long you have held your shares in a
fund. Any net short-term or long-term capital gains (net of any capital loss
carryovers) generally will be distributed once each year, and may be distributed
more frequently, if necessary, in order to reduce or eliminate federal excise or
income taxes on a fund.
Gains from securities sold by the underlying Franklin Templeton funds (or a
fund) that are held for more than one year will be taxable at a maximum rate of
20% for individual investors in the 28% or higher federal income tax brackets;
at a maximum rate of 10% for individual investors in the 15% federal income tax
bracket. Gains from securities sold by the underlying Franklin Templeton funds
(or a fund) prior to January 1, 1998, are taxable at different rates depending
on the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gains rate is 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more than
five years that are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities that are purchased after December 31, 2000 and are held for more than
5 years. Taxpayers subject to tax at the higher rates may also make an election
for shares held on January 1, 2001 to recognize gain on their shares in order to
qualify such shares as qualified 5-year property.
Additional information on reporting capital gains distributions on your personal
income tax returns is available in Franklin Templeton's Tax Information
Handbook. Please call Fund Information to request a copy. Questions about your
personal tax reporting should be addressed to your personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. A fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. To the extent that the
underlying Franklin Templeton 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 Franklin Templeton fund. When these gains are distributed to a fund
and subsequently are distributed to you, they will be taxable as ordinary
income. Similarly, foreign exchange losses realized by the underlying Franklin
Templeton 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 Franklin
Templeton fund's income available for distribution to a fund, and, in turn, a
fund's distributions of ordinary income to you. This may cause some or all of a
fund's previously distributed income to be classified as a return of capital.
An underlying Franklin Templeton fund may also be subject to foreign withholding
taxes on income from certain of its foreign securities. These taxes will
decrease the amount of income available for distribution to a fund.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. Each fund in which you are
shareholder will inform you of the amount and character of your distributions at
the time they are paid, and will shortly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such
distributions. If you have not held fund shares for a full year, you may have
designated and distributed to you as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in a fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, a fund
must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of other
regulated investment companies) can exceed 5% of the fund's total assets or
10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the sale
or disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities,
or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires a fund to distribute at
least 98% of its taxable ordinary income earned during the calendar year and 98%
of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. Each fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by a fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in a fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in the fund or
in another of the Franklin Templeton Funds, and the sales charge that would
otherwise apply to your reinvestment is reduced or eliminated. 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.
U.S. GOVERNMENT OBLIGATIONS. Because each fund 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 a 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, a 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.
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 Franklin Templeton
funds from domestic (U.S.) corporations. You will be permitted in some
circumstances to deduct these qualified dividends, thereby reducing the tax that
you would otherwise be required to pay on these dividends. The
dividends-received deduction will be available only with respect to dividends
designated by a fund as eligible for such treatment.
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 Franklin Templeton fund were debt-financed or held by
the underlying Franklin Templeton fund for less than a 46-day period during a
90-day period beginning 45 days before the ex-dividend date of the corporate
stock. Similarly, if your fund shares are debt-financed or held for less than
this same 46-days period then the dividends-received deduction may also be
reduced or eliminated. Even if designated as dividends eligible for the
deduction, all dividends (including any deducted portion) must be included in
your alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. An underlying Franklin Templeton 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 Franklin Templeton fund are generally governed by section 1256 of
the Code. These "section 1256" positions generally include listed options on
debt securities, options on broad-based stock indexes, options on securities
indexes, options on futures contracts, regulated futures contracts and certain
foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held by
an underlying Franklin Templeton 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 Franklin Templeton fund's fiscal year (and on other dates as
prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. Even though marked-to-market, gains and losses realized on 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 Franklin Templeton fund. The acceleration of income
on section 1256 positions may require the underlying Franklin Templeton 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 Franklin Templeton 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 underlying Franklin Templeton 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 Franklin Templeton 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 Franklin Templeton fund holds an option or contract which
substantially diminishes the underlying Franklin Templeton fund's risk of loss
with respect to another position of the underlying Franklin Templeton 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 Franklin Templeton 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.
When an underlying Franklin Templeton fund enters into "constructive sale
transactions," the underlying Franklin Templeton fund must recognize gain (but
not loss) on any constructive sale of an appreciated financial position in
stock, a partnership interest or certain debt instruments. The underlying
Franklin Templeton fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to a fund by an underlying Franklin Templeton fund out of
ordinary income and short-term capital gains arising from the underlying
Franklin Templeton fund's investments, including investments in options,
forwards, and futures contracts 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 underlying Franklin Templeton funds will monitor their
transactions in such options and contracts and may make certain other tax
elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. Many of the underlying
Franklin Templeton 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 Franklin Templeton fund accrues income (including dividends), or
accrues expenses which are denominated in a foreign currency, and the time the
underlying Franklin Templeton fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward 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 are
also 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 Franklin Templeton fund's net investment company taxable
income, which, in turn, will affect the amount of income to be distributed to
you by a fund.
If an underlying Franklin Templeton fund's section 988 losses exceed the
underlying Franklin Templeton fund's other net investment company taxable income
during a taxable year, the underlying Franklin Templeton fund generally will not
be able to make ordinary dividend distributions to the funds for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than as
an ordinary dividend or capital gain distribution. 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.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The underlying
Franklin Templeton fund may 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 Franklin Templeton fund receives an "excess distribution" with
respect to PFIC stock, the underlying Franklin Templeton fund itself may be
subject to U.S. federal income tax on a portion of the distribution, whether or
not the corresponding income is distributed by the underlying Franklin Templeton
fund. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the underlying
Franklin Templeton fund held the PFIC shares. The underlying Franklin Templeton
fund will be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior fund taxable years, and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years. In
this case, neither a fund nor you would be permitted to claim a credit on its or
your own tax return for the tax paid by the underlying Franklin Templeton 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 Franklin Templeton fund's distributions
to a fund that are treated as ordinary dividends rather than long-term capital
gain dividends.
The underlying Franklin Templeton fund may be eligible to elect alternative tax
treatment with respect to PFIC shares. Under an election that currently is
available in some circumstances, the underlying Franklin Templeton 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, under another election that
involves marking-to-market the underlying Franklin Templeton fund's PFIC shares
at the end of each taxable year (and on certain other dates as prescribed in the
Code), unrealized gains would be treated as though they were realized. The
underlying Franklin Templeton fund would also be allowed an ordinary deduction
for the excess, if any, of the adjusted basis of its investment in the PFIC
stock over its fair market value at the end of the taxable year. This deduction
would be limited to the amount of any net mark-to-market gains previously
included with respect to that particular PFIC security. If the underlying
Franklin Templeton fund were to make this second PFIC election, tax at the
underlying Franklin Templeton fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the underlying Franklin Templeton fund (if any), the amounts
distributable to a fund by the underlying Franklin Templeton funds, the time at
which these distributions must be made, and whether these distributions will be
classified as ordinary income or capital gain 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 Franklin Templeton fund acquires shares in
that corporation. While the underlying 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 do so and they reserve the right
to make such investments as a matter of their fundamental investment policy.
CONVERSION TRANSACTIONS. Gains realized by an underlying Franklin Templeton 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 Franklin Templeton
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 Franklin Templeton
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 may have an effect on the amount and character of
income realized by one or more of the funds, and distributed to you.
STRIPPED PREFERRED STOCK. Occasionally, an underlying Franklin Templeton 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
Franklin Templeton 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 Franklin
Templeton 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.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. An
underlying Franklin Templeton 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 and make
distributions prior to its receipt of cash payments. Zero coupon and delayed
interest bonds are normally issued at a discount and are therefore generally
subject to tax reporting as OID obligations. The underlying Franklin Templeton
fund is required to accrue as income a portion of the discount at which these
securities were issued, and to distribute such income each year (as ordinary
dividends) in order to maintain its qualification as a regulated investment
company and to avoid income reporting and excise taxes at the underlying
Franklin Templeton 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 Franklin Templeton fund. Bonds acquired in the secondary market
for a price less than their stated redemption price, or revised issue price in
the case of a bond having OID, are said to have been acquired with market
discount. For these bonds, the underlying Franklin Templeton fund may elect to
accrue market discount on a current basis, in which case the underlying Franklin
Templeton fund will be required to distribute any such accrued discount. If the
underlying Franklin Templeton 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 Franklin
Templeton 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.
DEFAULTED OBLIGATIONS. An underlying Franklin Templeton fund may be required to
accrue income on defaulted obligations and to distribute such income to a fund
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 Franklin Templeton 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 underlying Franklin Templeton
fund shares.
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of each 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. Each 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 each 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, 1998 and
1997.
AGGREGATE AMOUNT
UNDERWRITING UNDERWRITING RECEIVED BY
COMMISSIONS COMMISSIONS DISTRIBUTORS FROM
RECEIVED BY RETAINED BY REDEMPTIONS
FUND DISTRIBUTORS DISTRIBUTORS OR REPURCHASES
- --------------------------------------------------------------------------------
1998
Conservative Target Fund...... $149,891 $ 7,184 $3,273
Moderate Target Fund ......... 313,481 15,897 5,498
Growth Target Fund 402,330 24,771 9,605
1997
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 plans for
each class, as discussed below. Except as noted, Distributors received no other
compensation from the funds 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, each 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, each 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, the manager or Distributors or other parties on behalf of the
fund, the manager 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 the manager, 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, 1998, Distributors' eligible expenditures for
advertising, printing, and payments to underwriters and broker-dealers pursuant
to the 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.. $ 38,809 $ 15,184
Conservative Target - Class II...... 122,072 64,428
Moderate Target Fund - Class I ..... 58,181 35,046
Moderate Target Fund - Class II .... 221,873 121,500
Growth Target Fund - Class I ....... 78,051 44,198
Growth Target Fund - Class II ...... 243,113 133,785
HOW DO THE FUNDS 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 a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the funds 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
funds to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund. The
average annual total return for the indicated periods ended July 31, 1998, was
as follows:
FUND ONE-YEAR FROM INCEPTION*
- ------------------------------------------------------------------------------
Conservative Target Fund - Class I..... -0.62% 5.30%
Conservative Target Fund - Class II.... 2.52% 7.62%
Moderate Target Fund - Class I......... -2.27% 6.53%
Moderate Target Fund - Class II........ 1.03% 8.67%
Growth Target Fund - Class I........... -3.26% 5.97%
Growth Target Fund - Class II.......... -0.12% 8.61%
*December 31, 1996.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above.
The cumulative total return for the indicated periods ended July 31, 1998, was
as follows:
FUND ONE-YEAR FROM INCEPTION*
- ------------------------------------------------------------------------------
Conservative Target Fund - Class I..... -0.62% 8.50%
Conservative Target Fund - Class II.... 2.52% 12.30%
Moderate Target Fund - Class I......... -2.27% 10.51%
Moderate Target Fund - Class II........ 1.03% 14.04%
Growth Target Fund - Class I........... -3.26% 9.60%
Growth Target Fund - Class II.......... -0.12% 13.93%
*December 31, 1996.
VOLATILITY
Occasionally statistics may be used to show a fund's volatility or risk.
Measures of volatility or risk are generally used to compare a 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 funds 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 funds 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 funds may include in their advertising or sales material information
relating to investment goals 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 funds may satisfy your
investment goal, advertisements and other materials about the funds 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 and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average is a
combination of the Dow Jones Industrial Average (30 blue-chip stocks that are
generally leaders in their industry), the Dow Jones Transportation Average (20
transportation stocks), and the Dow Jones Utilities Average (15 utility stocks
involved in the production of electrical energy).
b) Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
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) 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.
n) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price, and total return for Treasury, agency, corporate and mortgage bonds.
o) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
p) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
q) 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.
r) SB Mortgage Index:
o Measures price, yield and total return of Mortgage-backed securities.
s) 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.
t) 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.
u) Federal Reserve H15 publication: Measures yields for Constant Maturity
treasury instruments.
v) The Goldman Sachs Convertible 100 Bond Index: Measures yield, price, and
total return of Convertible Bonds.
w) CD Rates: Published by the Wall Street Journal, measures yields of
Certificates of Deposit from Major New York Banks.
x) 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.
y) Payden & Rygel 90 Day T-Bill Index: Measures total return of a Constant
Maturity 90 day T-Bill.
z) IBC Money Market Insight: Measures yield and return and assets of money
market funds.
aa) Bond Buyer 20-Bond Index - an index of municipal bond yields based upon
yields of 20 general obligation bonds maturing in 20 years.
bb) Bond Buyer 40-Bond Index - an index of municipal bond yields based upon
yields of 40 revenue bonds maturing in 30 years.
cc) 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.
dd) 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in a 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 a 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 a fund's shares can be expected to
increase. CDs are frequently insured by an agency of the U.S. government. An
investment in a 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 a 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 funds 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 a fund
cannot guarantee that these goals will be met.
Each 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 50 years and
now services more than 3 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $236 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 119 U.S. based open-end
investment companies to the public. Each 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 goals, no two are exactly alike. As
noted in the Prospectus, shares of the funds 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 September 11, 1998, the principal shareholders of the Conservative Target
Fund and Growth Target Fund, beneficial or of record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
- ------------------------------------------------------------------------------
CONSERVATIVE TARGET FUND - CLASS I
Franklin Templeton
Trust Company
Trustee for ValuSelect
WL Hailey & Company, Inc.
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 117,386.635 10.55%
Patrick Gribbon Pers. Rep.
Est. Henry J. Jubinville
7700 N. Kendall Dr. Suite 505
Miami, FL 33156 89,301.385 8.02%
CONSERVATIVE TARGET FUND - CLASS II
Dean Witter Reynolds Inc. Cust.
Frank S. Sikora
Church St. Station - P.O. Box 250
New York, NY 10277-1763 51,237.653 5.10%
GROWTH TARGET FUND - CLASS I
Franklin Templeton
Trust Company Trustee
for ValuSelect
DPRA Incorporated
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438 231,657.695 8.77%
Franklin Templeton
Trust Company Trustee
for ValuSelect
Alburger Basso De Grosz Inc.
Attention: Trading
P.O. Box 2438
Rancho Cordova CA 95741-2438 154,481.329 5.85%
From time to time, the number of fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of Moderate Target Fund, no other person holds beneficially or of
record more than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each 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 and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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, 1998, including the auditor's
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I AND CLASS II - Each fund offers two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in the fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the funds' 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., 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 funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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 5.75% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the funds dated December 1, 1998, which we may
amend 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.
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.
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, 1998 as filed electronically with the Securities and Exchange
Commission on Form Type N-30D on September 21, 1998.
(i) Independent Auditor's Report
(ii) Financial Highlights
(iii) Statement of Investments - July 31, 1998
(iv) Statements of Assets and Liabilities - July 31, 1998
(v) Statements of Operations - for the year ended July 31, 1998
(vi) Statements of Changes in Net Assets - for year ended
July 31, 1998 and the period December 31, 1996 (effective date)
to July 31, 1997
(vii) Notes to Financial Statements
(b) Exhibits
The following exhibits are incorporated herein by reference, except exhibits
8(iii), 8(iv), 8(v), 10(i), 11(i), 17(i), 17(ii), 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
(iii) Amendment to Master Custody Agreement dated February 27,
1998 on behalf of all funds listed on Exhibit A
(iv) Amendment dated May 7, 1997 to the Master Custody Agreement
dated February 16, 1996 between Registrant and Bank of New
York
(v) Foreign Custody Manager Agreement between Registrant and
Bank of New York made as of July 30, 1998, effective as of
February 27, 1998
(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;
(i) Opinion and Consent of Counsel
(11) copies of any other opinions, appraisals or rulings and consents
to 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 pan. Such form(s) should disclose the costs
and fees charged in connection therewith;
Not Applicable
(15) copies of any pan 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)
Not Applicable
(17) Powers of Attorney
(i) Power of Attorney dated May 19, 1998
(ii) Certificate of Secretary dated May 19, 1998
(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: Post-Effective Amendment No. 1 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: June 30, 1997
(27) Financial Data Schedule
(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
Not Applicable
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 manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group
of Funds. In addition, Mr. Charles B. Johnson was formerly a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Form ADV of the Funds' Investment Manager (SEC File
801-26292), incorporated herein by reference, which sets forth the officers
and directors of the Investment Manager and information as to any business,
profession, vocation or employment of a substantial nature engaged in by
those officers and directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
(a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
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
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 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 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 21st
day of September, 1998.
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: September 21, 1998
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: September 21, 1998
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: September 21, 1998
Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: September 21, 1998
Harris J. Ashton* Trustee
Harris J. Ashton Dated: September 21, 1998
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: September 21, 1998
Edith E. Holiday* Trustee
Edith E. Holiday Dated: September 21, 1998
Charles B. Johnson* Trustee
Charles B. Johnson Dated: September 21, 1998
Rupert H. Johnson, Jr.* Trustee
Rupert H. Johnson, Jr. Dated: September 21, 1998
Frank W.T. LaHaye* Trustee
Frank W.T. LaHaye Dated: September 21, 1998
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: September 21, 1998
*By: /s/ Larry L. Greene
Attorney-in-Fact
(Pursuant to Powers of Attorney filed herein)
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.B8(iii) Amendment to Master Custody Agreement dated Attached
February 27, 1998 on behalf of all funds listed
on Exhibit A
EX-99.B8(iv) Amendment dated May 7, 1997 to the Master Attached
Custody Agreement dated February 16, 1996
between Registrant and Bank of New York
EX-99.B8(v) Foreign Custody Manager Agreement between Attached
Registrant and Bank of New York made as of July
30, 1998, effective as of February 27, 1998
EX-99.B9(i) Administration Agreement between Registrant and *
Franklin Templeton Services, Inc., dated
November 19, 1996
EX-99.B10(i) Opinion and Consent of Cousel Attached
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.Bl3(i) Subscription Agreement between Registrant and *
Franklin Resources, Inc., dated December 19, 1996
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.B17(i) Power of Attorney dated May 19, 1998 Attached
EX-99.B17(ii) Certificate of Secretary dated May 19, 1998 Attached
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
Amendment to Master Custody Agreement
Effective February 27, 1998, The Bank of New York and each of the Investment
Companies listed in the Attachment appended to this Amendment, for themselves
and each series listed in the Attachment, hereby amend the Master Custody
Agreement dated as of February 16, 1996 by:
1. Replacing Exhibit A with the attached; and
2. Only with respect to the Investment Companies and series thereof listed
in the Attachment, deleting paragraphs (a) and (b) of Subsection 3.5 and
replacing them with the following:
(a) Promptly after each purchase of Securities by the Fund, the Fund
shall deliver to the Custodian Proper Instructions specifying with
respect to each such purchase: (a) the Series to which such Securities
are to be specifically allocated; (b) the name of the issuer and the
title of the Securities; (c) the number of shares or the principal
amount purchased and accrued interest, if any; (d) the date of purchase
and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the
broker through whom the purchase was made, and the name of the clearing
broker, if any; and (h) the name of the broker to whom payment is to be
made. The Custodian shall, upon receipt of Securities purchased by or
for the Fund, pay to the broker specified in the Proper Instructions
out of the money held for the account of such Series the total amount
payable upon such purchase, provided that the same conforms to the
total amount payable as set forth in such Proper Instructions.
(b) Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian Proper Instructions specifying with respect to
each such sale: (a) the Series to which such Securities were
specifically allocated; (b) the name of the issuer and the title of the
Security; (c) the number of shares or the principal amount sold, and
accrued interest, if any; (d) the date of sale; (e) the sale price per
unit; (f) the total amount payable to the Fund upon such sale; (g) the
name of the broker through whom or the person to whom the sale was
made, and the name of the clearing broker, if any; and (h) the name of
the broker to whom the Securities are to be delivered. The Custodian
shall deliver the Securities specifically allocated to such Series to
the broker specified in the Proper Instructions against payment of the
total amount payable to the Fund upon such sale, provided that the same
conforms to the total amount payable as set forth in such Proper
Instructions.
Investment Companies The Bank of New York
By: /s/ Elizabeth N. Cohernour By: /s/ Stephen E. Grunston
Name: Elizabeth N. Cohernour Name: Stephen E. Grunston
Title: Authorized Officer Title: Vice President
Attachment
INVESTMENT COMPANY SERIES
Franklin Mutual Series Fund Inc. Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin Valuemark Funds Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Variable Products Mutual Shares Investments Fund
Series Fund Mutual Discovery Investments Fund
<TABLE>
<CAPTION>
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the
Master Custody Agreement dated as of February 16, 1996.
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business
Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Govt Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Franklin Corporate Qualified Dividend Fund
Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Shares Fund
Mutual Qualified Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual European Fund
Mutual Discovery Fund
Franklin New York Tax-Free Income Delaware Business Trust
Fund
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Templeton Fund Delaware Business Trust Franklin Templeton Conservative Target Fund
Allocator Series Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Money Market Fund
Trust Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Global Utilities Securities Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
Franklin Valuemark Funds (cont.) Massachusetts Business Templeton Pacific Growth Fund
Trust Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Global Health Care Securities Fund
Value Securities Fund
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
Templeton Variable Products Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Growth Investments Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Principal Maturity Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
INTERVAL FUND
Franklin Floating Rate Trust Delaware Business Trust
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
</TABLE>
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as
follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon [2] business days prior notice from a Fund that it will
invest in any security issued by a Russian issuer ("Russian Security"), the
Custodian shall to the extent required and in accordance with the terms of the
Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract
must establish the Foreign Custodian's right to conduct regular share
confirmations on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated to
effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must establish
the Foreign Custodian's right to hold shares not held directly in the beneficial
owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow
the independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the Registrar's
responsibilities with regard to corporate actions and other
distributions; (ii) the Registrar's liabilities as established under the
regulations applicable to the Russian share registration -system and (iii)
the procedures for making a claim against and receiving compensation from the
registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Subcustodian to maintain custody of the Fund's share register
extracts or other evidence of verification obtained pursuant to paragraph (b)
above.
(d) The Custodian shall, pursuant to the Subcustodian Agreement,
direct the Foreign Custodian to comply with the rules, regulations, orders and
"no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and
delivery of Securities; and
(2) providing notice to the Fund and its Board of Directors of
events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or inaction
of any Registrar or securities depository utilized in connection with Russian
Securities except to the extent that any such action or inaction was the result
of the Custodian's negligence. With respect to any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees (collectively,
"Losses") incurred by a Fund as a result of the acts or the failure to act by
any Foreign Custodian or its subsidiary in Russia ("Subsidiary"), the Custodian
shall take appropriate action to recover such Losses from the Foreign Custodian
or Subsidiary. The Custodian's sole responsibility and liability to a Fund with
respect to any Losses shall be limited to amounts so received from the Foreign
Custodian or Subsidiary (exclusive of costs and expenses incurred by the
Custodian) except to the extent that such losses were the result of the
Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By: /s/STEPHEN E. GRUNSTON
------------------------
Name: Stephen E. Grunston
Title: Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By: /s/DEBORAH R. GATZEK
------------------------
Name: Deborah R. Gatzek
Title: Vice President
By: /s/KAREN L. SKIDMORE
----------------------
Name: Karen L. Skidmore
Title: Assistant Vice President
AMENDMENT TO MASTER CUSTODY AGREEMENT
The Bank of New York and Templeton Variable Products Series Fund, for itself and
on behalf of its series, hereby amend Schedule A of the Master Custody Agreement
dated as of February 16, 1996, to add the series listed below:
REGISTERED INVESTMENT COMPANY SERIES
- ------------------------------- -----------------
Templeton Variable Products Series Fund Franklin Growth Investments Fund
Dated as of: May 1, 1997
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By: /s/KAREN L. SKIDMORE
---------------------------
Title: Assistant Vice President And
Assistant Secretary
THE BANK OF NEW YORK
By: /s/STEPHEN E. GRUNSTON
----------------------------
Title: VICE PRESIDENT
FOREIGN CUSTODY MANAGER AGREEMENT
AGREEMENT made as of July 30, 1998, effective as of February 27, 1998
(the "Effective Date"), between Each of the Investment Companies Listed on
Schedule I attached hereto (each a "Fund") and The Bank of New York ("BNY").
WITNESSETH:
WHEREAS, the Fund desires to appoint BNY as a Foreign Custody Manager
on the terms and conditions contained herein;
WHEREAS, BNY desires to serve as a Foreign Custody Manager and perform
the duties set forth herein on the terms and condition contained herein;
NOW THEREFORE, in consideration of the mutual promises hereinafter
contained in this Agreement, the Fund and BNY hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "BOARD" shall mean the board of directors or board of trustees,
as the case may be, of the Fund.
2. "ELIGIBLE FOREIGN CUSTODIAN" shall have the meaning provided in
the Rule.
3. "MONITORING SYSTEM" shall mean a system established by BNY to
fulfill the Responsibilities specified in clauses l(b)(i) and l(b)(ii) and
l(d) of Article III of this Agreement.
4. "QUALIFIED FOREIGN BANK" shall have the meaning provided in the
Rule.
5. "RESPONSIBILITIES" shall mean the responsibilities delegated to
BNY as a Foreign Custody Manager with respect to each Specified Country and
each Eligible Foreign Custodian selected by BNY, as such responsibilities are
more fully described in Article III of this Agreement.
6. "RULE" shall mean Rule 17f-5 under the Investment Company Act of
1940, as amended, as such Rule became effective on June 16, 1997.
7. "SECURITIES DEPOSITORY" shall mean any securities depository or
clearing agency within the meaning of Section (a)(1)(ii) or (a)(1)(iii) of
the Rule.
8. "COMPULSORY DEPOSITORY" shall mean a Securities Depository the
use of which is mandatory by law or regulation or because securities cannot
be withdrawn from such Securities Depository, or because maintaining
securities outside the Securities Depository would not permit purchases and
sales of these securities to occur in accordance with routine settlement
timing and procedures in the relevant market.
9. "SPECIFIED COUNTRY" shall mean each country listed on Schedule 2
attached hereto and each country, other than the United States, constituting
the primary market for a security with respect to which the Fund has given
settlement instructions to The Bank of New York as custodian (the
"Custodian") under its Custody Agreement with the Fund.
ARTICLE II
BNY AS A FOREIGN CUSTODY MANAGER
1. The Fund on behalf of its Board hereby delegates to BNY with
respect to each Specified Country the Responsibilities.
2. BNY accepts the Board's delegation of Responsibilities with
respect to each Specified Country and agrees in performing the
Responsibilities as a Foreign Custody Manager to exercise reasonable care,
prudence and diligence such as a person having responsibility for the
safekeeping of the Fund's assets would exercise.
3. BNY shall provide to the Board at such times as the Board deems
reasonable and appropriate based on the circumstances of the Fund's foreign
custody arrangements written reports notifying the Board of the placement of
assets of the Fund with a particular Eligible Foreign Custodian within a
Specified Country and of any material change in the arrangements (including,
in the case of Qualified Foreign Banks, any material change in any contract
governing such arrangements and in the case of Securities Depositories, any
material change in the established practices or procedures of such Securities
Depositories) with respect to assets of the Fund with any such Eligible
Foreign Custodian.
ARTICLE III
RESPONSIBILITIES
1 . (a) Subject to the provisions of this Agreement, BNY shall with
respect to each Specified Country select an Eligible Foreign Custodian (other
than a Compulsory Depository) which is not functioning as the Fund's Eligible
Foreign Custodian as of the Effective Date. In connection therewith, BNY
shall: (i) determine that assets of the Fund held by such Eligible Foreign
Custodian will be subject to reasonable care, based on the standards
applicable to custodians in the relevant market in which such Eligible
Foreign Custodian operates, after considering all factors relevant to the
safekeeping of such assets, including, without limitation, those contained in
Section (c)(1) of the Rule; (ii) determine that the Fund's foreign custody
arrangements with each Qualified Foreign Bank are governed by a written
contract with the Custodian (or, in the case of a Securities Depository other
than a Compulsory Depository, by such a contract, by the rules or established
practices or procedures of the Securities Depository, or by any combination
of the foregoing) which will provide reasonable care for the Fund's assets
based on the standards specified in paragraph (c)(1) of the Rule; and (ii)
determine that each contract with a Qualified Foreign Bank shall include the
provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or,
alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F)
provisions, such other provisions as BNY determines will provide, in their
entirety, the same or a greater level of care and protection for the assets
of the Fund as such specified provisions.
(b) In addition, subject to the provisions of this Agreement, BNY
shall with respect to each Eligible Foreign Custodian (other than a
Compulsory Depository), regardless of when and by whom selected, (i)
monitor pursuant to the Monitoring System the appropriateness of
maintaining the assets of the Fund with a particular Eligible Foreign
Custodian pursuant to paragraph (c)(1) of the Rule and in the case of a
Qualified Foreign Bank, any material change in the contract governing such
arrangement and in the case of a Securities Depository, any material change
in the established practices or procedures of such Securities Depository;
and (ii) advise the Fund whenever an arrangement (including, in the case of
a Qualified Foreign Bank, any material change in the contract governing
such arrangement and in the case of a Securities Depository, any material
change in the established practices or procedures of such Securities
Depository) described in preceding clause (b)(i) no longer meets the
requirements of the Rule, it being understood that BNY shall provide such
advice promptly upon learning of such noncompliance.
(c) Subject to the provisions of this Agreement, after execution of
this Agreement with respect to each Compulsory Depository which has been
established, as of the Effective Date, in countries in which BNY has
appointed a Subcustodian and thereafter in connection with each new or
additional Compulsory Depository established in countries in which BNY
appoints, or has appointed, as the case may be, a Subcustodian, BNY shall
determine, with respect to each such Compulsory Depository, that:
(i) the Eligible Foreign Custodian which is utilizing the services of
the Compulsory Depository has undertaken to adhere to the rules,
practices and procedures of such Compulsory Depository;
(ii)no regulatory authority with oversight responsibility for the
Compulsory Depository has issued a public notice that the Compulsory
Depository is not in compliance with any material capital, solvency,
insurance or other similar financial strength requirements imposed by
such authority or, in the case of such notice having been issued,
that such notice has been withdrawn or the remedy of such
noncompliance has been publicly announced by the Compulsory
Depository;
(iii) no regulatory authority with oversight responsibility over
the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material internal
controls requirement imposed by such authority or, in the case such
notice having been issued, that such notice has been withdrawn or the
remedy of such noncompliance has been publicly announced by the
Compulsory Depository;
(iv)the Compulsory Depository maintains the assets of the Fund's
Eligible Foreign Custodian which is utilizing the services of the
Compulsory Depository under no less favorable safekeeping conditions
than those that apply generally to other participants in the
Compulsory Depository;
(v) the Compulsory Depository maintains records that segregate the
Compulsory Depository's own assets from the assets of participants in
the Compulsory Depository;
(vi)the Compulsory Depository maintains records that identify the
assets of each of its participants;
(vii) the Compulsory Depository provides periodic reports to its
participants with respect to the safekeeping of assets maintained by
the Compulsory Depository, including, by way of example, notification
of any transfer to or from a participant's account; and
(viii) the Compulsory Depository is subject to periodic review,
such as audits by independent accountants or inspections by
regulatory authorities.
BNY shall make the foregoing determinations (i) with respect to each
Compulsory Depository which has been established as of the Effective Date in
countries in which BNY has appointed a Subcustodian by September 30, 1998 and
(ii) with respect to each new or additional Compulsory Depository established
in countries in which BNY appoints, or has appointed, as the case may be, a
Subcustodian, to the extent feasible in light of the circumstances then
prevailing within ninety (90) days of the date such Compulsory Depository
commences operations; and, in each case, shall advise the Fund and its
investment advisor promptly after each such determination is made.
In the event that the US Securities and Exchange Commission ("SEC")
adopts standards or criteria different from those set forth above, the
above provisions shall be deemed to be amended to conform to the standards
or criteria adopted by the SEC.
(d) Subject to the provisions of this Agreement, with respect to each
Compulsory Depository in which Fund's assets are maintained at any time
during the term of this Agreement, BNY shall monitor, pursuant to the
Monitoring System, each such Compulsory Depository's compliance with the
criteria set forth in clause l(c) of this Article III and, upon determining
that any Compulsory Depository is not in compliance with any of such
criteria, shall promptly advise the Fund and its investment advisor of such
non-compliance.
2. (a) For purposes of clauses (a)(i), (a)(ii) and (c) of preceding
Section I of this Article, BNY's determination with respect to each
Securities Depository will be based upon publicly available information,
which may be limited, plus any other information which is made available by
each such Securities Depository to BNY or its Qualified Foreign Bank.
(b) For purposes of clause (b)(i) of preceding Section I of
this Article, BNY's determination of appropriateness shall not include, nor
be deemed to include, any evaluation of Country Risks associated with
investment in a particular country. For purposes hereof, "Country Risks"
shall mean systemic risks of holding assets in a particular country
including, but not limited to, (i) the use of Compulsory Depositories, (ii)
such country's financial infrastructure, (iii) such country's prevailing
custody and settlement practices, (iv) nationalization, expropriation or
other governmental actions, (v) regulation of the banking or securities
industry, (vi) currency controls, restrictions, devaluations or
fluctuations, and (vii) market conditions which affect the orderly
execution of securities transactions or affect the value of securities.
ARTICLE IV
REPRESENTATIONS
1. The Fund hereby represents that: (a) this Agreement has been duly
authorized, executed and delivered by the Fund, constitutes a valid and
legally binding obligation of the Fund enforceable in accordance with its
terms, and no statute, regulation, rule, order, judgment or contract binding
on the Fund prohibits the Fund's execution or performance of this Agreement;
(b) this Agreement has been approved and ratified by the Board at a meeting
duly called and at which a quorum was at all times present; and (c) the Board
or its investment advisor has considered the Country Risks associated with
investment in each Specified Country and will have considered such risks
prior to any settlement instructions being given to the Custodian with
respect to any other Specified Country.
2. BNY hereby represents that: (a) BNY is duly organized and
existing under the laws of the State of New York, with full power to carry on
its businesses as now conducted, and to enter into this Agreement and to
perform its obligations hereunder; (b) this Agreement has been duly
authorized, executed and delivered by BNY, constitutes a valid and legally
binding obligation of BNY enforceable in accordance with its terms, and no
statute, regulation, rule, order, judgment or contract binding on BNY
prohibits BNY's execution or performance of this Agreement; and (c) BNY has
established the Monitoring System.
ARTICLE V
CONCERNING BNY
1 . BNY shall not be liable for any costs, expenses, damages,
liabilities or claims, including attorneys' and accountants' fees, sustained
or incurred by, or asserted against, the Fund except to the extent the same
arises out of the failure of BNY to exercise the care, prudence and diligence
required by Section 2 of Article II hereof. In no event shall BNY be liable
to the Fund, the Board, or any third party for special, indirect or
consequential damages, or for lost profits or loss of business, arising in
connection with this Agreement.
2. The Fund shall indemnify BNY and hold it harmless from and
against any and all costs, expenses, damages, liabilities or claims,
including attorneys' and accountants' fees, sustained or incurred by, or
asserted against, BNY by reason or as a result of any action or inaction, or
arising out of BNY's performance hereunder, provided that the Fund shall not
indemnify BNY to the extent any such costs, expenses, damages, liabilities or
claims arises out of BNY's failure to exercise the reasonable care, prudence
and diligence required by Section 2 of Article II hereof.
3. For its services hereunder, the Fund agrees to pay to BNY such
compensation and out-of-pocket expenses as shall be mutually agreed.
4. BNY shall have only such duties as are expressly set forth
herein. In no event shall BNY be liable for any Country Risks associated
with investments in a particular country.
ARTICLE VI
MISCELLANEOUS
1 This Agreement constitutes the entire agreement between the Fund
and BNY, and no provision in the Custody Agreement between the Fund and the
Custodian shall affect the duties and obligations of BNY hereunder, nor shall
any provision in this Agreement affect the duties or obligations of the
Custodian under the Custody Agreement.
2. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to BNY, shall be sufficiently given if received
by it at its offices at 90 Washington Street, New York, New York 10286, or at
such other place as BNY may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required
by this Agreement to be given to the Fund shall be sufficiently given if
received by it at its offices at Franklin Resources, 777 Mariners Island
Boulevard, San Mateo, California, 94404, Attn: Deborah R. Gatzek, General
Counsel and Senior Vice President, or at such other place as the Fund may
from time to time designate in writing.
4. In case any provision in or obligation under this Agreement shall
be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions shall not in any way
be affected thereby. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties. This
Agreement shall extend to and shall be binding upon the parties hereto, and
their respective successors and assigns; provided however, that this
Agreement shall not be assignable by either party without the written consent
of the other.
5. This Agreement shall be construed in accordance with the
substantive laws of the State of New York, without regard to conflicts of
laws principles thereof
6. The parties hereto agree that in performing hereunder, BNY is
acting solely on behalf of the Fund and no contractual or service
relationship shall be deemed to be established hereby between BNY and any
other person.
7. This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
8. This Agreement shall terminate simultaneously with the
termination of the Custody Agreement between the Fund and the Custodian, and
may otherwise be terminated by either party giving to the other party a
notice in writing specifying the date of such termination, which shall be not
less than thirty (30) days after the date of such notice.
IN WITNESS WHEREOF, the Fund and BNY have caused this Agreement to be
executed by their respective officers, thereunto duly authorized, as of the
date first above written.
EACH INVESTMENT COMPANY
LISTED ON SCHEDULE 1 ATTACHED
HERETO.
By: Deborah R. Gatzek
Title: Vice President
Of Each Such Investment Company
THE BANK OF NEW YORK
By: Stephen E. Grunston
Title: Vice President
SCHEDULE 1
<TABLE>
<CAPTION>
INVESTMENT COMPANY SERIES
<S> <C>
Franklin Gold Fund
Franklin Asset Allocation Fund
Franklin Equity Fund
Franklin High Income Trust AGE High Income Fund
Franklin Custodian Funds, Inc. Growth Series
Utilities Series
DynaTech Series
Income Series
Franklin Investors Securities Trust Franklin Global Government Income Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Value Investors Trust Franklin Balance Sheet Investment
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Strategic Mortgage Portfolio
Franklin Managed Trust Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Strategic Series Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Templeton International Trust Templeton Pacific Growth Fund
Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund
INVESTMENT COMPANY SERIES
Franklin Valuemark Funds Money Market Fund
Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Global Utilities Securities Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 20 1 0
Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity Fund
Small Cap Fund
Capital Growth Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Global Health Care Securities Fund
Value Securities Fund
Franklin Universal Trust
Franklin Multi-Income Trust
Franklin Floating Rate Trust
Franklin Templeton Fund Allocator Series Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
SCHEDULE 2
- ----------------------------------------------------------- ---------------------------------------------------------
Country/ Country/
Market Subcustodian(s) Market Subcustodian(s)
- ----------------------------------------------------------- ---------------------------------------------------------
- ----------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C>
Argentina BankBoston, N.A. Hungary Citibank Budapest Rt.
Australia Conunonwealth Bank of Australia/ Iceland Landsbanki Islands
National Australia Bank Limited
Austria Creditanstalt AG India The Hongkong and Shanghai Banking
Corporation Limited/Deutsche Bank AG
Bahrain The British Bank of the Middle East Indonesia The Hongkong and Shanghai
Banking
Bangladesh Standard Chartered Bank Corporation Limited
Belgium Banque Bruxelles Lambert Ireland Allied Irish Banks, plc
Bermuda Bank of Bermuda Limited Israel Bank Leumi LE - Israel B.M.
Italy Banca Commerciale Italiana/
Botswana Stanbic Bank Botswana Limited Banque Paribas S.A.
Brazil BankBoston, N.A. Ivory Coast Societe Geneale de Banque en Cete d'Ivoire
Bulgaria ING Bank-Sofia
Jamaica CIBC Trust & Merchant Bank Jamaica
Canada Royal Bank of Canada Litd
Chile BankBoston, N.A. Japan The Bank of Tokyo-Mitsubishi Limited/
China Standard Chartered Bank The Fuji Bank, Limited
Colombia Cititrust Colombia S.A. Jordan The British Bank of the Middle East
Costa Rica Banco BCT Kenya Stanbic Bank Kenya Limited
Croatia Pfivredna Banka Zagreb d.d. Latvia Societe Generale Riga
Cyprus Bank of Cyprus Lebanon The British Bank of the Middle East
Czech Republic Ceskoslovenska Obchodni Banka A.S. Lithuania Vilniaus Bankas
Denmark Den Danske Bank Luxembourg Banque Internationale a Luxembourg
Malaysia Hongkong Bank Malaysia Berhad
EASDAQ Banque Bruxelles Lambert Malta Mid-Med Bank Pic
Ecuador Citibank, N.A. Mauritius The Hongkong and Shanghai
Egypt Citibank, N.A. Banking
Estonia Hansabank Limited. Corporation Limited
Euromarket Cedel Bank Mexico Banco Nacional de Mexico
Euromarket Euroclear Morocco Banque Commerciale du Maroc
Finland MeTita Bank Ltd. Namibia Stanbic Bank Namibia Limited
France Banque Paribas S.A./ Netherlands Mees Pierson
Credit Commercial de France New Zealand Australia and New Zealand Banking Group
Germany Dresdner Bank AG
Ghana Merchant Bank (Ghana) Limited Nigeria Stanbic Merchant Bank Nigeria Limited
Greece National Bank of Greece SA Norway Den norske Bank ASA
Oman The British Bank of the Middle East
Hong Kong The Hongkong and Shanghai Banking
Corporation Limited Pakistan Standard Chartered Bank
Portugal Banco Comercial Portugues/ Peru Citibank, N.A.
Banco Espirito Santo Philippines The Hongkong and Shanghai Banking
Romania ING Bank Bucharest Branch Corporation Limited
Poland Bank Handlowy W Warszawie S.A
Russia Vneshtorgbank (Min Fin Bonds only)/
Credit Suisse First Boston Limited/ Switzerland Union Bank of Switzerland/
Unexim Bank Bank Leu Ltd.
Singapore United Overseas Bank Limited/ Taiwan The Hongkong and Shanghai Banking
The Development Bank of Singapore Ltd Corporation Limited
Slovakia Ceskoslovenska Obchodna Banka, a.s Thailand Standard Chartered Bank
Slovenia Banka Creditsanstalt D.D., Ljubljana Bangkok Bank Public Company Limited
South Africa The Standard Bank of South Africa Tunisia Banque Internationale Arabe de Tunisie
Limited
Turkey Osmanli Bankasi A.S. (Ottoman Bank)
South Korea Standard Chartered Bank Ukraine Bank Ukraina
Spain Banco Bilbao Vizcaya United Kingdom The Bank of New York, N.A./
SriLanka Standard Chartered Bank First Chicago Clearing Center
Swaziland Stanbic Bank Swaziland Limited United States The Bank of New York, N.A.
Sweden Skandinaviska Enskilda Banken Uruguay BankBoston, N.A.
Venezuela Citibank, N.A.
Zambia Stanbic Bank Zambia Limited
Zimbabwe Stanbic Bank Zimbabwe Limited
</TABLE>
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
September 15, 1998
Franklin Templeton Fund Allocator Series
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust, as
amended (the "Declaration of Trust") of the Franklin Templeton Fund Allocator
Series (the "Trust"), a business trust organized under the laws of the State
of Delaware on September 18, 1995, the By-Laws of the Trust and the various
pertinent proceedings we deem material. We have also examined the
Notification of Registration and the Registration Statements filed under the
Investment Company Act of 1940 (the "Investment Company Act") and the
Securities Act of 1933 (the "Securities Act"), all as amended to date, as
well as other items we deem material to this opinion.
The Trust is authorized by its Declaration of Trust to issue an
unlimited number of shares of beneficial interest with a par value of $0.01
per share. The Trust issues series designated the Franklin Templeton
Conservative Target Fund, the Franklin Templeton Moderate Target Fund, and
the Franklin Templeton Growth Target Fund. The Declaration of Trust
designates, or authorizes the Trustees to designate, one or more series or
classes of shares of the Trust, and allocates, or authorizes the Trustees to
allocate, shares of beneficial interest to each such series or class. The
Declaration of Trust also empowers the Trustees to designate any additional
series or classes and allocate shares to such series or classes.
The Trust has filed with the U.S. Securities and Exchange
Commission (the "Commission"), a Registration Statement under the Securities
Act, which Registration Statement is deemed to register an indefinite number
of shares of the Trust pursuant to the provisions of Rule 24f-2 under the
Investment Company Act. You have further advised us that the Trust has
filed, and each year hereafter will timely file, a Notice pursuant to Rule
24f-2 perfecting the registration of the shares sold by the Trust during each
fiscal year during which such registration of an indefinite number of shares
remains in effect.
You have also informed us that the shares of the Trust have been,
and will continue to be, sold in accordance with the Trust's usual method of
distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in
accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as
the Trust remains a valid and subsisting trust under the laws of the State of
Delaware, and the registration of an indefinite number of shares of the Trust
remains effective, the authorized shares of the Trust when issued for the
consideration set by the Board of Trustees pursuant to the Declaration of
Trust, and subject to compliance with Rule 24f-2, will be legally
outstanding, fully-paid, and non-assessable shares, and the holders of such
shares will have all the rights provided for with respect to such holding by
the Declaration of Trust and the laws of the State of Delaware.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments
thereto, filed in accordance with the securities laws of the several states
in which shares of the Trust are offered, and we further consent to reference
in the registration statement of the Trust to the fact that this opinion
concerning the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /S/ BRUCE G. LETO
Bruce G. Leto
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Post-Effective Amendment No. 3 to the
Registration Statement of Franklin Templeton Fund Allocator Series on Form
N-1A (File No. 333-13601) of our report dated September 8, 1998 on our audit
of the financial statements and financial highlights of the funds comprising
the Franklin Templeton Fund Allocator Series, which report is included in the
Annual Report to Shareholders for the year ended July 31, 1998, which is
incorporated by reference in the Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
September 18, 1998
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN TEMPLETON FUND ALLOCATOR
SERIES (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS,
DEBORAH R. GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to
each of them to act alone) his attorney-in-fact and agent, in all capacities,
to execute, file or withdraw any of the documents referred to below relating
to Post-Effective Amendments to the Registrant's registration statement on
Form N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority.
Each of the undersigned grants to each of said attorneys, full authority to
do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes as he could do if personally present, thereby
ratifying all that said attorneys-in-fact and agents, may lawfully do or
cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of this 19th day of May, 1998.
/S/ DONALD P. GOULD /S/ CHARLES B. JOHNSON
Donald P. Gould, Charles B. Johnson,
Principal Executive Officer Trustee
and Trustee
/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/S/ S. JOSEPH FORTUNATO /S/ RUPERT H. JOHNSON, JR.
S. Joseph Fortunato, Rupert H. Johnson, Jr.,
Trustee Trustee
/S/ EDITH E. HOLIDAY /S/ FRANK W. T. LAHAYE
Edith E. Holiday, Frank W. T. LaHaye,
Trustee Trustee
/S/ GORDON S. MACKLIN /S/ DIOMEDES LOO-TAM
Gordon S. Macklin, Diomedes Loo-Tam,
Trustee Principal Accounting Officer
/S/ MARTIN L. FLANAGAN
Martin L. Flanagan,
Principal Financial Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of FRANKLIN TEMPLETON FUND
ALLOCATOR SERIES (the "Trust").
As Secretary of the Trust, I further certify that the following resolution
was adopted by a majority of the Trustees of the Trust present at a meeting
held at 777 Mariners Island Boulevard, San Mateo, California, on May 19, 1998.
RESOLVED, that a Power of Attorney, substantially in the
form of the Power of Attorney presented to this Board,
appointing Mark H. Plafker, Harmon E. Burns, Deborah R.
Gatzek, Karen L. Skidmore and Larry L. Greene as
attorneys-in-fact for the purpose of filing documents with
the Securities and Exchange Commission, be executed by a
majority of the Trustees and designated officers.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/s/ Deborah R. Gatzek
Dated: May 19, 1998 Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1998 ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 20,541,525
<INVESTMENTS-AT-VALUE> 20,324,742
<RECEIVABLES> 1,469,148
<ASSETS-OTHER> 111,027
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,904,917
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49,856
<TOTAL-LIABILITIES> 49,856
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,684,241
<SHARES-COMMON-STOCK> 1,057,811
<SHARES-COMMON-PRIOR> 148,049
<ACCUMULATED-NII-CURRENT> 132,272
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 255,331
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (216,783)
<NET-ASSETS> 21,855,061
<DIVIDEND-INCOME> 575,613
<INTEREST-INCOME> 8,158
<OTHER-INCOME> 0
<EXPENSES-NET> (141,801)
<NET-INVESTMENT-INCOME> 441,970
<REALIZED-GAINS-CURRENT> 299,473
<APPREC-INCREASE-CURRENT> (426,817)
<NET-CHANGE-FROM-OPS> 314,626
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (117,143)
<DISTRIBUTIONS-OF-GAINS> (24,813)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,389,033
<NUMBER-OF-SHARES-REDEEMED> (497,910)
<SHARES-REINVESTED> 18,639
<NET-CHANGE-IN-ASSETS> 17,236,230
<ACCUMULATED-NII-PRIOR> 21,261
<ACCUMULATED-GAINS-PRIOR> 12,003
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (31,017)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (180,325)
<AVERAGE-NET-ASSETS> 12,406,336
<PER-SHARE-NAV-BEGIN> 10.870
<PER-SHARE-NII> 0.390
<PER-SHARE-GAIN-APPREC> 0.180
<PER-SHARE-DIVIDEND> (0.380)
<PER-SHARE-DISTRIBUTIONS> (0.060)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.000
<EXPENSE-RATIO> 0.760<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1>EXPENSE RATIO EXCLUDING WAIVER 1.07%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1998 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
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 20,541,525
<INVESTMENTS-AT-VALUE> 20,324,742
<RECEIVABLES> 1,469,148
<ASSETS-OTHER> 111,027
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,904,917
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49,856
<TOTAL-LIABILITIES> 49,856
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 21,684,241
<SHARES-COMMON-STOCK> 935,350
<SHARES-COMMON-PRIOR> 278,499
<ACCUMULATED-NII-CURRENT> 132,272
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 255,331
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (216,783)
<NET-ASSETS> 21,855,061
<DIVIDEND-INCOME> 575,613
<INTEREST-INCOME> 8,158
<OTHER-INCOME> 0
<EXPENSES-NET> (141,801)
<NET-INVESTMENT-INCOME> 441,970
<REALIZED-GAINS-CURRENT> 299,473
<APPREC-INCREASE-CURRENT> (426,817)
<NET-CHANGE-FROM-OPS> 314,626
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (162,713)
<DISTRIBUTIONS-OF-GAINS> (31,332)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 734,164
<NUMBER-OF-SHARES-REDEEMED> (95,223)
<SHARES-REINVESTED> 17,910
<NET-CHANGE-IN-ASSETS> 17,236,230
<ACCUMULATED-NII-PRIOR> 21,261
<ACCUMULATED-GAINS-PRIOR> 12,003
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (31,017)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (180,325)
<AVERAGE-NET-ASSETS> 12,406,336
<PER-SHARE-NAV-BEGIN> 10.810
<PER-SHARE-NII> 0.330
<PER-SHARE-GAIN-APPREC> 0.150
<PER-SHARE-DIVIDEND> (0.310)
<PER-SHARE-DISTRIBUTIONS> (0.060)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.920
<EXPENSE-RATIO> 1.500<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1>EXPENSE RATIO EXCLUDING WAIVER 1.81%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1998 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> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 42,741,822
<INVESTMENTS-AT-VALUE> 42,293,739
<RECEIVABLES> 531,693
<ASSETS-OTHER> 70,704
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42,896,136
<PAYABLE-FOR-SECURITIES> 260,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106,491
<TOTAL-LIABILITIES> 366,491
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,387,075
<SHARES-COMMON-STOCK> 2,137,514
<SHARES-COMMON-PRIOR> 577,198
<ACCUMULATED-NII-CURRENT> 187,741
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 402,912
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (448,083)
<NET-ASSETS> 42,529,645
<DIVIDEND-INCOME> 1,039,682
<INTEREST-INCOME> 7,551
<OTHER-INCOME> 0
<EXPENSES-NET> (281,309)
<NET-INVESTMENT-INCOME> 765,924
<REALIZED-GAINS-CURRENT> 642,901
<APPREC-INCREASE-CURRENT> (1,093,493)
<NET-CHANGE-FROM-OPS> 315,332
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (351,014)
<DISTRIBUTIONS-OF-GAINS> (429,281)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,909,614
<NUMBER-OF-SHARES-REDEEMED> (422,808)
<SHARES-REINVESTED> 73,510
<NET-CHANGE-IN-ASSETS> 31,336,691
<ACCUMULATED-NII-PRIOR> 55,548
<ACCUMULATED-GAINS-PRIOR> 655,869
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (62,386)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (324,854)
<AVERAGE-NET-ASSETS> 24,958,213
<PER-SHARE-NAV-BEGIN> 11.260
<PER-SHARE-NII> 0.370<F1>
<PER-SHARE-GAIN-APPREC> 0.010<F1>
<PER-SHARE-DIVIDEND> (0.380)<F1>
<PER-SHARE-DISTRIBUTIONS> (0.490)<F1>
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.770
<EXPENSE-RATIO> 0.770<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1>PER SHARE AMOUNTS HAVE BEEN CALCULATED USING THE DAILY AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
<F2>EXPENSE RATIO EXCLUDING WAIVER 0.94%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1998 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> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 42,741,822
<INVESTMENTS-AT-VALUE> 42,293,739
<RECEIVABLES> 531,693
<ASSETS-OTHER> 70,704
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42,896,136
<PAYABLE-FOR-SECURITIES> 260,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106,491
<TOTAL-LIABILITIES> 366,491
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,387,075
<SHARES-COMMON-STOCK> 1,830,957
<SHARES-COMMON-PRIOR> 420,721
<ACCUMULATED-NII-CURRENT> 187,741
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 402,912
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (448,083)
<NET-ASSETS> 42,529,645
<DIVIDEND-INCOME> 1,039,682
<INTEREST-INCOME> 7,551
<OTHER-INCOME> 0
<EXPENSES-NET> (281,309)
<NET-INVESTMENT-INCOME> 765,924
<REALIZED-GAINS-CURRENT> 642,901
<APPREC-INCREASE-CURRENT> (1,093,493)
<NET-CHANGE-FROM-OPS> 315,332
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (292,695)
<DISTRIBUTIONS-OF-GAINS> (466,577)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,492,882
<NUMBER-OF-SHARES-REDEEMED> (155,840)
<SHARES-REINVESTED> 73,194
<NET-CHANGE-IN-ASSETS> 31,336,691
<ACCUMULATED-NII-PRIOR> 55,548
<ACCUMULATED-GAINS-PRIOR> 655,869
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (62,386)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (324,854)
<AVERAGE-NET-ASSETS> 24,958,213
<PER-SHARE-NAV-BEGIN> 11.160
<PER-SHARE-NII> 0.300<F1>
<PER-SHARE-GAIN-APPREC> 0.000<F1>
<PER-SHARE-DIVIDEND> (0.320)<F1>
<PER-SHARE-DISTRIBUTIONS> (0.490)<F1>
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.650
<EXPENSE-RATIO> 1.500<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1>PER SHARE AMOUNTS HAVE BEEN CALCULATED USING THE DAILY AVERAGE
SHARES OUTSTANDING DURING THE PERIOD,
<F2>EXPENSE RATIO EXCLUDING WAIVER 1.68%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1998 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> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 48,643,594
<INVESTMENTS-AT-VALUE> 47,765,485
<RECEIVABLES> 929,233
<ASSETS-OTHER> 69,305
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,764,023
<PAYABLE-FOR-SECURITIES> 790,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 179,846
<TOTAL-LIABILITIES> 969,846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 47,835,075
<SHARES-COMMON-STOCK> 2,422,453
<SHARES-COMMON-PRIOR> 850,786
<ACCUMULATED-NII-CURRENT> 155,461
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 681,750
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (878,109)
<NET-ASSETS> 47,794,177
<DIVIDEND-INCOME> 1,066,032
<INTEREST-INCOME> 8,318
<OTHER-INCOME> 0
<EXPENSES-NET> (329,502)
<NET-INVESTMENT-INCOME> 744,848
<REALIZED-GAINS-CURRENT> 1,002,779
<APPREC-INCREASE-CURRENT> (1,648,322)
<NET-CHANGE-FROM-OPS> 99,305
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (373,894)
<DISTRIBUTIONS-OF-GAINS> (184,015)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,871,216
<NUMBER-OF-SHARES-REDEEMED> (351,545)
<SHARES-REINVESTED> 51,996
<NET-CHANGE-IN-ASSETS> 33,423,753
<ACCUMULATED-NII-PRIOR> 37,571
<ACCUMULATED-GAINS-PRIOR> 12,012
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (76,453)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (400,003)
<AVERAGE-NET-ASSETS> 30,586,230
<PER-SHARE-NAV-BEGIN> 11.330
<PER-SHARE-NII> 0.330
<PER-SHARE-GAIN-APPREC> (0.050)
<PER-SHARE-DIVIDEND> (0.300)
<PER-SHARE-DISTRIBUTIONS> (0.150)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.160
<EXPENSE-RATIO> 0.750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1> EXPENSE RATIO EXCLUDING WAIVER 0.98%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES JULY 31, 1998 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> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 48,643,594
<INVESTMENTS-AT-VALUE> 47,765,485
<RECEIVABLES> 929,233
<ASSETS-OTHER> 69,305
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,764,023
<PAYABLE-FOR-SECURITIES> 790,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 179,846
<TOTAL-LIABILITIES> 969,846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 47,835,075
<SHARES-COMMON-STOCK> 1,872,304
<SHARES-COMMON-PRIOR> 418,893
<ACCUMULATED-NII-CURRENT> 155,461
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 681,750
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (878,109)
<NET-ASSETS> 47,794,177
<DIVIDEND-INCOME> 1,066,032
<INTEREST-INCOME> 8,318
<OTHER-INCOME> 0
<EXPENSES-NET> (329,502)
<NET-INVESTMENT-INCOME> 744,848
<REALIZED-GAINS-CURRENT> 1,002,779
<APPREC-INCREASE-CURRENT> (1,648,322)
<NET-CHANGE-FROM-OPS> 99,305
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (263,042)
<DISTRIBUTIONS-OF-GAINS> (149,026)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,595,204
<NUMBER-OF-SHARES-REDEEMED> (180,003)
<SHARES-REINVESTED> 38,210
<NET-CHANGE-IN-ASSETS> 33,423,753
<ACCUMULATED-NII-PRIOR> 37,571
<ACCUMULATED-GAINS-PRIOR> 12,012
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (76,453)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (400,003)
<AVERAGE-NET-ASSETS> 30,586,230
<PER-SHARE-NAV-BEGIN> 11.300
<PER-SHARE-NII> 0.240
<PER-SHARE-GAIN-APPREC> (0.050)
<PER-SHARE-DIVIDEND> (0.260)
<PER-SHARE-DISTRIBUTIONS> (0.150)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.080
<EXPENSE-RATIO> 1.500<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000
<FN>
<F1> EXPENSE RATIO EXCLUDING WAIVER 1.73%
</FN>
</TABLE>
