PROSPECTUS & APPLICATION
FRANKLIN TEMPLETON
FUND ALLOCATOR SERIES
DECEMBER 1, 1997 AS AMENDED AUGUST 3, 1998
INVESTMENT STRATEGY Franklin Templeton Conservative Target
Fund
GROWTH & INCOME Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes the Class I and Class II shares of the three series
of Franklin Templeton Fund Allocator Series (the "Trust").
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated December 1, 1997,
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.
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.
FRANKLIN TEMPLETON
FUND ALLOCATOR SERIES
This prospectus is not an offering of the securities herein described in any
state, jurisdiction or country in which the offering is not authorized. No
sales representative, dealer, or other person is authorized to give any
information or make any representations other than those contained in this
prospectus. Further information may be obtained from Distributors.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................. 2
Financial Highlights ............................................. 4
How does the Fund Invest its Assets? ............................. 8
What are the Fund's Potential Risks? ............................. 13
How Do the Underlying Funds Invest their Assets? ................. 14
What are the Underlying Funds' Potential Risks? .................. 52
Who Manages the Fund? ............................................ 56
Taxes ............................................................ 60
How is the Trust Organized? ...................................... 63
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 64
May I Exchange Shares for Shares of Another Fund? ................ 72
How Do I Sell Shares? ............................................ 75
What Distributions Might I Receive from the Fund? ................ 78
Transaction Procedures and Special Requirements .................. 79
Services to Help You Manage Your Account ......................... 83
What If I Have Questions About My Account? ....................... 85
GLOSSARY
Useful Terms and Definitions ..................................... 86
APPENDICES
What are some of the Other Investment
Policies and Strategies of, and Risks of an
Investment in, the Underlying Funds? ............................. 88
Description of Ratings ........................................... 107
Franklin
Templeton
Fund Allocator Series
December 1, 1997
as amended August 3, 1998
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in each
fund. The expenses are estimates based upon anticipated fees and expenses for
the fiscal year ending July 31, 1998. The fund's actual expenses may vary.
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS I
Maximum Sales Charge Imposed on Purchases
(as a percentage of Offering Price)++ .......... 5.75% 5.75% 5.75%
Paid at time of redemption++++ ................. None None None
Exchange Fee (per transaction)* ................ $5.00 $5.00 $5.00
CLASS II
Maximum Sales Charges
(as a percentage of Offering Price) ............ 1.99% 1.99% 1.99%
Paid at time of purchase+++ .................... 1.00% 1.00% 1.00%
Paid at redemption++++ ......................... 0.99% 0.99% 0.99%
Exchange Fee (per transaction)* ................ $5.00 $5.00 $5.00
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS I
Asset Allocation Fees** ........................ 0.00% 0.00% 0.00%
Rule 12b-1 Fees*** ............................. 0.25% 0.25% 0.25%
Other Expenses** ............................... 0.50% 0.50% 0.50%
Management Fees of the Underlying Funds ........ 0.57% 0.59% 0.60%
Other Expenses of the Underlying Funds ......... 0.23% 0.25% 0.33%
Total Fund Operating Expenses** ................ 1.55% 1.59% 1.68%
CLASS II
Asset Allocation Fees** ........................ 0.00% 0.00% 0.00%
Rule 12b-1 Fees*** ............................. 1.00% 1.00% 1.00%
Other Expenses** ............................... 0.50% 0.50% 0.50%
Management Fees of the Underlying Funds ........ 0.57% 0.59% 0.60%
Other Expenses of the Underlying Funds ......... 0.23% 0.25% 0.33%
Total Fund Operating Expenses** ................ 2.30% 2.34% 2.43%
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the fund.
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
CLASS I
One Year**** ..................... $ 72 $ 73 $ 74
Three Years ...................... $104 $105 $107
CLASS II
One Year ......................... $43 $43 $44
Three Years ...................... $81 $82 $85
For the same Class II investment, you would pay projected expenses of $33
(Conservative Target Fund), $33 (Moderate Target Fund), and $34 (Growth
Target Fund) if you did not sell your shares at the end of the first year.
Your projected expenses for the three-year period would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class I shares.
+++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.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
**With respect to each fund, Advisers has agreed in advance to limit the
asset allocation fee and/or make certain payments to reduce the fund's direct
operating expenses so that each fund's direct operating expenses do not
exceed 0.75% for Class I and 1.50% for Class II. Absent this agreement, it is
estimated that each fund's Asset Allocation Fee would be 0.25% and total
direct fund operating expenses would be as follows: Conservative Target Fund
3.80% for Class I and 4.55% for Class II; Moderate Target Fund 1.34% for
Class I and 2.09% for Class II; and Growth Target Fund 2.21% for Class I and
2.96% for Class II. Advisers may end this arrangement at any time. The funds
will also indirectly bear their pro rata share of the expenses of the
Underlying Funds in which they invest.
***These fees may not exceed 0.25% for Class I 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 NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the fund's independent auditors. Their
audit report covering the period shown below appears in the Trust's Annual
Report to Shareholders for the fiscal year ended July 31, 1997. The Annual
Report to Shareholders also includes more information about the fund's
performance. For a free copy, please call Fund Information.
CONSERVATIVE TARGET FUND: CLASS I SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period................ $10.00
Net Investment Income................................. .12
Net Realized & Unrealized Gain on Securities.......... .80
Total From Investment Operations...................... .92
Distributions From Net Investment Income.............. (.05)
Total Distributions................................... (.05)
Net Asset Value at End of Period...................... $10.87
Total Return+......................................... 9.21%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's)................ $1,609
Ratio of Expenses to Average Net Assets++............. 0.59%**
Ratio of Net Investment Income to Average Net Assets.. 3.93%**
Portfolio Turnover Rate............................... 33.30%
CONSERVATIVE TARGET FUND: CLASS II SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period................ $10.00
Net Investment Income................................. .10
Net Realized & Unrealized Gain on Securities.......... .75
Total From Investment Operations...................... .85
Distributions From Net Investment Income.............. (.04)
Total Distributions................................... (.04)
Net Asset Value at End of Period...................... $10.81
Total Return+......................................... 8.48%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's)................ $3,010
Ratio of Expenses to Average Net Assets++ ............ 1.48%**
Ratio of Net Investment Income
to Average Net Assets................................ 3.04%**
Portfolio Turnover Rate............................... 33.30%
Moderate Target Fund: Class I Shares
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period................ $10.00
Net Investment Income................................. .17
Net Realized & Unrealized Gain on Securities.......... 1.13
Total From Investment Operations...................... 1.30
Distributions From Net Investment Income.............. (.04)
Total Distributions................................... (.04)
Net Asset Value at End of Period...................... $11.26
Total Return+......................................... 13.05%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's)................ $6,498
Ratio of Expenses to Average Net Assets++............. 0.67%**
Ratio of Net Investment Income
to Average Net Assets ............................... 2.69%**
Portfolio Turnover Rate .............................. 264.78%
MODERATE TARGET FUND: CLASS II SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period ............... $10.00
Net Investment Income ................................ .07
Net Realized & Unrealized Gain on Securities ......... 1.11
Total From Investment Operations ..................... 1.18
Distributions From Net Investment Income ............. (.02)
Total Distributions .................................. (.02)
Net Asset Value at End of Period ..................... $11.16
Total Return+ ........................................ 11.84%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) ............... $4,695
Ratio of Expenses to Average Net Assets++ ............ 1.50%**
Ratio of Net Investment Income
to Average Net Assets ............................... 1.86%**
Portfolio Turnover Rate .............................. 264.78%
GROWTH TARGET FUND: CLASS I SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period ............... $10.00
Net Investment Income ................................ .05
Net Realized & Unrealized Gain on Securities ......... 1.28
Total From Investment Operations ..................... 1.33
Distributions From Net Investment Income ............. -
Total Distributions .................................. -
Net Asset Value at End of Period ..................... $11.33
Total Return+ ........................................ 13.30%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) ............... $9,638
Ratio of Expenses to Average Net Assets++ ............ 0.73%**
Ratio of Net Investment Income
to Average Net Assets ............................... 2.65%**
Portfolio Turnover Rate .............................. 65.52%
GROWTH TARGET FUND: CLASS II SHARES
FOR THE
PERIOD ENDED
JULY 31, 1997*
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning of Period ............... $10.00
Net Investment Income ................................ .04
Net Realized & Unrealized Gain on Securities ......... 1.26
Total From Investment Operations ..................... 1.30
Distributions From Net Investment Income ............. -
Total Distributions .................................. -
Net Asset Value at End of Period ..................... $11.30
Total Return+ ........................................ 13.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End of Period (in 000's) ............... $4,733
Ratio of Expenses to Average Net Assets++ ............ 1.49%**
Ratio of Net Investment Income
to Average Net Assets ............................... 1.89%**
Portfolio Turnover Rate .............................. 65.52%
*For the period December 31, 1996 (effective date) to July 31, 1997.
**Annualized
+Total return measures the change in value of an investment over the period.
It is not annualized. It does not include the maximum front-end sales charge
or Contingent Deferred Sales Charge, and assumes reinvestment of dividends
and capital gains at Net Asset Value.
++During the period, Advisers agreed in advance to waive the asset allocation
fees and made payments of other expenses incurred by the funds. Had such
action not been taken, the ratio of expenses to average net assets during the
period would have been as follows:
RATIO OF EXPENSES
TO AVERAGE NET ASSETS**
CONSERVATIVE TARGET FUND:
Class I Shares ........................... 3.64%
Class II Shares .......................... 4.53%
MODERATE TARGET FUND:
Class I Shares ........................... 1.26%
Class II Shares .......................... 2.09%
GROWTH TARGET FUND:
Class I Shares ........................... 2.19%
Class II Shares .......................... 2.95%
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's Investment Objective
The investment objective of each fund is the highest level of long-term total
return that is consistent with an acceptable level of risk. Each fund will
pursue its investment objective through active asset allocation implemented
primarily with investments in a combination of Franklin Templeton Funds. The
objective is a fundamental policy of each fund and may not be changed without
shareholder approval. Of course, there is no assurance that each fund's
objective will be achieved.
The Trust consists of three separate funds. The funds all pursue the same
investment objective, but with different levels of risk and return. Each fund
is designed to be a long-term investment. The descriptions below compare the
three funds' levels of risk and return relative to one another and are not
intended to imply any particular absolute level of risk or return for any
fund.
Conservative Target Fund is designed for investors seeking the highest level
of long-term total return that is consistent with a lower level of risk. This
fund may therefore be most appropriate for investors having a shorter time
horizon associated with their investments.
Moderate Target Fund is designed for investors seeking the highest level of
long-term total return that is consistent with a moderate level of risk. This
fund may therefore be most appropriate for investors having an intermediate
time horizon associated with their investments.
Growth Target Fund is designed for investors seeking the highest level of
long-term total return that is consistent with a higher level of risk. This
fund may therefore be most appropriate for investors having a longer time
horizon associated with their investments.
Investors may gain the following benefits through participation in the Trust:
Convenient, efficient access to a broadly diversified portfolio of
Franklin Templeton Funds, in a single investment.
Disciplined asset allocation, implemented and continually reviewed by
professional portfolio managers.
A choice of three funds offering a continuum of risk/return levels,
enabling the investor to select that fund (or combination of funds)
which most closely matches the investor's risk/return preferences.
Types of Securities in which the Fund May Invest
The funds will invest primarily in open-end investment companies (mutual
funds) that are members of the Franklin Templeton Group of Funds
(individually, or together, the "Underlying Fund(s)"). The Underlying Funds
include funds investing in U.S. and foreign stocks, bonds, and money market
instruments. At any point in time, it can be expected that each fund will
invest in a different combination of Underlying Funds, reflecting the
different levels of risk and return each fund seeks. Advisers will employ
various measures in evaluating the risk level of each fund, including
volatility (i.e., the variability of returns from one period to the next) and
"downside" risk (i.e., the likelihood of the return in a particular period
being below a specified level).
The allocation of the assets of each fund will be determined by Advisers.
Advisers or other affiliates of Resources serve as the investment manager to
the Underlying Funds. In determining the asset allocation of the funds,
Advisers will first establish an allocation according to asset classes.
Advisers will then implement such allocation through investment in an
appropriate combination of Underlying Funds.
The Underlying Funds that will be considered for investment by each fund are
listed below, grouped within broad asset classes. The asset class headings
below are provided for convenience and are approximate in nature. The
investment policies of the Underlying Funds may permit the funds to invest in
securities that are in addition to the securities described by a particular
asset class heading. For more detailed information on the investment policies
of each Underlying Fund, see "How Do the Underlying Funds Invest their
Assets?" in this prospectus. The list of Underlying Funds may change from
time to time upon the recommendation of Advisers without shareholder approval.
U.S. EQUITY FUNDS
Franklin Equity Fund
Growth Series
Utilities Series
Franklin Small Cap Growth Fund
Franklin Value Fund
Franklin Real Estate Securities Fund
Mutual Shares Fund
Mutual Discovery Fund
U.S. FIXED-INCOME FUNDS
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin U.S. Government Securities Series
Franklin Investment Grade Income Fund
Franklin's AGE High Income Fund
INTERNATIONAL EQUITY FUNDS
Mutual European Fund
Templeton Foreign Fund
Templeton Developing Markets Trust
Templeton Global Smaller Companies Fund
Templeton Foreign Smaller Companies Fund
Templeton Greater European Fund
Templeton Pacific Growth Fund
Templeton Latin America Fund
INTERNATIONAL FIXED-INCOME FUNDS
Franklin Templeton Hard Currency Fund
Templeton Global Bond Fund
Franklin Global Government Income Fund
Franklin Templeton German Government Bond Fund
NATURAL RESOURCES FUNDS
Franklin Gold Fund
Franklin Natural Resources Fund
Under normal circumstances, it can generally be anticipated that of the three
funds, the Growth Target Fund will hold a higher percentage of its assets in
Underlying Funds investing primarily in equity, international, and natural
resources securities than will the Moderate Target Fund, which in turn will
hold a higher percentage of its assets in such Underlying Funds than will the
Conservative Target Fund. Likewise, it can generally be anticipated that of
the three funds, the Conservative Target Fund will hold a higher percentage
of its assets in Underlying Funds investing primarily in fixed-income
securities than will the Moderate Target Fund, which in turn will hold a
higher percentage of its assets in such Underlying Funds than will the Growth
Target Fund.
The percentage ranges targeted for each fund by broad asset class are set
forth below. For purposes of these percentage ranges, Franklin Gold Fund,
Franklin Natural Resources Fund, Franklin Real Estate Securities Fund and
Utilities Series are considered "sector equity funds." The percentage ranges
applicable to each asset class for each fund may be changed from time to time
by Advisers without the approval of shareholders.
U.S. AND INTERNATIONAL
FIXED INCOME FUNDS
U.S. AND (INCLUDING DIRECT
INTERNATIONAL INVESTMENTS IN CASH SECTOR
FUND EQUITY FUNDS AND CASH EQUIVALENTS) EQUITY FUNDS
Conservative Target..... 20% to 50% 30% to 80% 0% to 20%
Moderate Target......... 30% to 70% 20% to 70% 0% to 30%
Growth Target........... 40% to 90% 10% to 60% 0% to 40%
Consistent with the table above, no more than 25% of a fund's assets will be
invested in any one Underlying Fund, except a fund may invest up to 50% of
its total assets in Franklin Short-Intermediate U.S. Government Securities
Fund and Franklin U.S. Government Securities Series.
Purchases of Shares of the Underlying Funds. The funds will invest only in
Class Z shares of Mutual Shares Fund, Mutual Discovery Fund and Mutual
European Fund and Advisor Class shares of the other Underlying Funds.
Accordingly, the funds will not pay any sales load or 12b-1 service or
distribution fees in connection with their investments in shares of the
Underlying Funds. The funds, however, will indirectly bear their pro rata
share of the fees and expenses incurred by the Underlying Funds that are
applicable to holders of Class Z and Advisor Class shares. The investment
returns of each fund, therefore, will be net of the expenses of the
Underlying Funds in which it is invested.
Direct Investment in Securities and Other Investment Strategies. Each fund
may invest a certain portion of its assets directly in the types of
securities in which the Underlying Funds invest. No fund intends to invest
more than 5% of its assets directly in such securities, except for securities
either issued or backed by the full faith and credit of the U.S. government
and repurchase agreements. Securities issued by the U.S. government include,
but are not limited to, U.S. Treasury bills, notes, and bonds, and securities
backed by the full faith and credit of the U.S. government include those
issued by the Government National Mortgage Association. For a description of
these securities, please see "U.S. Government Securities Series of Franklin
Custodian Funds, Inc." under "How Do the Underlying Funds Invest their
Assets?" and "What are some of the Other Investment Policies and Strategies
of, and Risks of an Investment in, the Underlying Funds?" in the Appendix to
this prospectus.
In addition, each fund may engage directly in the types of investment
strategies in which each Underlying Fund may engage. Each fund may use such
investment strategies to hedge investment positions, including investments
directly in securities and investments in the Underlying Funds, to protect
the fund against a decline in an Underlying Fund's value. No fund intends to
commit more than 5% of its assets to these investment strategies. For a
discussion of these investment strategies, see "What are the Fund's Potential
Risks?"; "Other Investment Policies of the Underlying Funds"; "What are the
Underlying Funds' Potential Risks?" and, in the Appendix, "What are some of
the Other Investment Policies and Strategies of, and Risks of an Investment
in, the Underlying Funds?".
Each fund is also authorized to invest up to 100% of its assets temporarily
in the same types of securities in which the Underlying Funds may invest
temporarily and under the same circumstances as the Underlying Funds. See
"Temporary Investments" in the Appendix.
See "What are the Fund's Potential Risks?," "How do the Underlying Funds
Invest their Assets?," "What are the Underlying Funds' Potential Risks?," the
Appendix, and the SAI.
Other Investment Policies of the Funds
Illiquid Investments. Each fund's policy is not to invest more than 15% of
its net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
Portfolio Turnover. Each fund anticipates its annual portfolio turnover rate
generally will not exceed 100%, but this expected rate is not a limiting
factor in the operation of each fund's portfolio. A fund may purchase or sell
its securities to: (a) accommodate purchases and sales of its shares; (b)
change the percentage of its assets invested in each of the Underlying Funds
in response to market conditions; and (c) maintain or modify the allocation
of its assets among the Underlying Funds. High turnover rates with respect to
the Underlying Funds may result in higher expenses being incurred by those
funds.
Other Policies and Restrictions. Each fund has a number of additional
investment restrictions that limit its activities to some extent. Some of
these restrictions may only be changed with shareholder approval. For a list
of these restrictions and more information about the funds' investment
policies, please see "How does the Fund Invest its Assets?" and "Investment
Restrictions" in the SAI.
Each of the fund's policies and restrictions discussed in this prospectus and
in the SAI is considered at the time the fund makes an investment. A fund is
generally not required to sell a security because of a change in
circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decreases. In this way, you participate in any change in the
value of the securities owned by the fund. In addition to the factors that
affect the value of any particular security that the fund owns, the value of
fund shares may also change with movements in the stock and bond markets as a
whole. The value of an investment in the Growth Target Fund will tend to
fluctuate more than an investment in the Moderate Target Fund, which in turn
will fluctuate more than an investment in Conservative Target Fund.
Investing in the Underlying Funds. More than 25% of the value of a fund's
assets is invested in a combination of the Underlying Funds. As a result,
each fund's investment performance is directly related to the investment
performance of the Underlying Funds held by it. The ability of each fund to
meet its investment objective is directly related to the ability of the
Underlying Funds to meet their objectives as well as the allocation among
those Underlying Funds by Advisers. There can be no assurance that the
investment objective of any fund or Underlying Fund will be achieved.
Investment Strategies of the Underlying Funds. The Underlying Funds may
engage in a variety of investment strategies which involve certain risks. As
a result, the funds may be subject to some of the risks resulting from these
strategies. Certain of the Underlying Funds may invest all or a portion of
their assets in foreign securities; invest all or a portion of their assets
in high yielding, high risk debt securities (commonly referred to as "junk
bonds"); enter into foreign currency transactions; engage in options
transactions; engage in futures contracts and options on future contracts;
purchase zero coupon bonds and pay-in-kind bonds; purchase restricted and
illiquid securities; enter into forward roll transactions; purchase
securities on a when-issued or delayed delivery basis; enter into repurchase
agreements; borrow money; loan portfolio securities and engage in various
other investment strategies. To the extent the funds directly purchase these
types of securities or engage in these investment strategies, they will be
subject to the same risks as the Underlying Funds. Further information on
these investment strategies can be found under "How Do the Underlying Funds
Invest their Assets?", "What are the Underlying Funds' Potential Risks?", and
in the Appendix, and in the SAI.
Non-Diversified Funds. Each fund is considered a non-diversified investment
company under the federal securities regulations which govern mutual funds
because it invests in the securities of a limited number of mutual funds. As
a result, each fund may be subject to greater risk with respect to its
individual portfolio than a fund that is more broadly diversified among a
number of issuers. However, the Underlying Funds themselves are diversified
investment companies with the exception of Franklin Value Fund, Franklin
Natural Resources Fund, Franklin Real Estate Securities Fund, Franklin
Templeton Hard Currency Fund, Templeton Global Bond Fund, Franklin Templeton
German Government Bond Fund and Franklin Global Government Income Fund.
Concentration. Seven of the Underlying Funds, Utilities Series, Franklin
Value Fund, Franklin Natural Resources Fund, Franklin Real Estate Securities
Fund, Franklin Gold Fund, Franklin Templeton Hard Currency Fund and Templeton
Global Bond Fund, may concentrate their investments in a particular industry
or sector; Franklin Templeton German Government Bond Fund will concentrate
its assets in debt obligations issued or guaranteed by the Federal Republic
of Germany, its agencies, instrumentalities or political subdivisions; and
Franklin Global Government Income Fund may invest more than 25% of its assets
in the securities of foreign governments. See "How Do the Underlying Funds
Invest their Assets?" Each fund does not intend to invest more than 25% of
its assets in any one of these Underlying Funds. In addition, the funds do
not intend to concentrate in any particular industry, sector or foreign
government security.
HOW DO THE UNDERLYING FUNDS INVEST THEIR ASSETS?
The following is a summary of the investment objectives and strategies of the
Underlying Funds and the types of securities in which they may invest. The
investment objectives of the Underlying Funds are fundamental policies and
there is no assurance that they will achieve their respective investment
objectives. Additional investment strategies with respect to the Underlying
Funds are described in "What are the Underlying Funds' Potential Risks?," the
Appendix, the SAI, and the prospectus of each Underlying Fund. For a free
copy of a prospectus of any of the Underlying Funds, call 1-800/DIAL BEN.
Equity Funds
As described below, the following Underlying Funds are funds that invest
primarily in equity securities.
U.S. Equity Funds
Franklin Equity Fund ("Equity"). The principal investment objective of Equity is
capital appreciation. The secondary objective of the fund is to provide current
income return through the receipt of dividends or interest from its investments.
Equity will normally invest at least 65% of its assets in common and preferred
stocks and securities convertible into common stocks. Equity generally invests
in securities of companies which, in its investment manager's opinion, are
undervalued but have strong future earnings growth prospects. The securities
which Equity may purchase are issued by U.S. or foreign companies. In addition,
Equity may invest in relatively new or unseasoned companies, which include
companies in new and emerging industries where the opportunity for rapid growth
is expected to be above-average. Investments in securities of issuers which have
less than three years' continuous operation will be limited to 5% of Equity's
total assets.
In seeking current income, Equity may also purchase a variety of preferred
and debt securities, including bonds, debentures, notes, and commercial paper
of corporate issuers. Equity's investment in preferred, convertible, and debt
securities may be rated investment grade (i.e., rated in one of the top four
categories by S&P or Moody's) or below investment grade. Securities are given
"ratings" by independent organizations which grade the issuer based upon its
financial soundness. Equity will not invest more than 5% of its net assets in
securities rated below investment grade. If Equity purchases a preferred,
convertible, or debt security that is unrated, the investment manager will
determine its quality and categorize it with similar quality securities that
have been rated. A list of these ratings is shown in the Appendix.
Equity will ordinarily purchase foreign securities which are traded in the
U.S., although it may buy foreign securities directly in foreign markets.
Equity may also purchase sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and European
Depositary Receipts ("EDRs"). GDRs and EDRs are typically issued by foreign
banks or trust companies and evidence ownership of underlying securities
issued by either a foreign or a U.S. corporation ADRs are certificates issued
by U.S. banks representing the right to receive the securities of a foreign
issuer deposited with the bank or a correspondent bank. Equity may also
purchase the securities of issuers in developing nations, but has no present
intention of doing so.
Growth Series of Franklin Custodian Funds, Inc. ("Growth"). The principal
investment objective of Growth is capital appreciation. The secondary
objective of Growth is current income. Growth primarily invests in common
stocks or convertible securities believed to offer favorable possibilities of
capital appreciation. The fund may invest in shares of capital stock traded
on any national securities exchange, or issued by a corporation, association
or similar entity having gross assets valued at not less than $1,000,000 as
shown on its latest published annual report, or in bonds or preferred stock
convertible into shares of capital stock listed for trading on a national
securities exchange. There are no restrictions on investment of Growth's
assets in foreign securities. The fund may purchase ADRs, and does not
presently intend to invest more than 25% of its net assets in foreign
securities not publicly traded in the U.S.
Utilities Series of Franklin Custodian Funds, Inc. ("Utilities"). The
investment objectives of Utilities are both capital appreciation and current
income. The assets of Utilities may be held in cash or cash equivalents, or
invested in securities of an issuer engaged in the public utilities industry.
The term "Public Utilities Industry" includes the manufacture, production,
generation, transmission, and sale of gas, water, and electricity. The term
also includes issuers engaged in the communications field including entities
such as telephone, cellular, telegraph, satellite, microwave, and other
companies providing communication facilities for the public's benefit. At
least 65% of the investments made by Utilities will be in the securities of
an issuer engaged in the Public Utilities Industry. Under normal
circumstances, however, the fund expects to have substantially all of its
assets invested in such securities and will be concentrated in the Public
Utilities Industry. To achieve its investment objective, Utilities invests
primarily in common stocks, including, from time to time, non-dividend paying
common stocks if, in the opinion of the investment manager, such securities
appear to offer attractive opportunities for capital appreciation. There are
no restrictions on investment of the fund's assets in foreign securities.
Utilities may purchase ADRs, and does not presently intend to invest more
than 10% of its net assets in foreign securities not publicly traded in the
U.S.
Utilities may also invest in preferred stocks and bonds issued by issuers
engaged in the Public Utilities Industry. When purchasing bonds, Utilities
may invest in securities regardless of their rating (including securities in
the lowest rating categories) depending upon prevailing market and economic
conditions or in securities which are not rated. Most of the fund's
investments, however, are rated at least Baa by Moody's or BBB by S&P. With
respect to unrated securities, it is also the fund's intent to purchase
securities which, in the view of its investment manager, would be comparable
in quality to the fund's rated securities. Utilities will neither purchase
issues that are in default nor invest in securities which are felt by the
investment manager to involve excessive risk.
Franklin Small Cap Growth Fund of Franklin Strategic Series ("Small Cap").
Small Cap's investment objective is long-term capital growth. Small Cap seeks
to achieve its objective by investing primarily in equity securities of small
capitalization growth companies. In general, companies in which Small Cap
will invest have a market capitalization of less than $1 billion at the time
of Small Cap's investment. The fund attempts to keep at least a third of its
assets invested in companies with market capitalization of $550 million or
less. Market capitalization is defined as the total market value of a
company's outstanding stock. Under normal market conditions, Small Cap will
invest at least 65% of its total assets in equity securities of small
capitalization growth companies. Selection of small company equity securities
for Small Cap will be based on characteristics such as the financial strength
of the company, the expertise of management, the growth potential of the
company within its industry, and the growth potential of the industry itself.
The fund may not invest more than 10% of its net assets in securities of
issuers with less than three years of continuous operations.
Equity securities will consist of common stock, preferred stock, warrants for
the purchase of common stock (up to 5% of the fund's total assets), and debt
securities convertible into or exchangeable for common or preferred stock.
Although Small Cap's assets will be invested primarily in equity securities
of small companies, the fund may invest up to 35% of its total assets in
equity securities of larger capitalization companies which the investment
manager believes have strong growth potential, in relatively well-known,
larger companies in mature industries which the investment manager believes
have the potential for capital appreciation. Small Cap may invest up to 25%
of its total assets in foreign securities, including those of developing
markets, and sponsored or unsponsored ADRs.
Small Cap may also invest up to 35% of its assets in corporate debt
securities consisting of bonds, notes, and debentures. The fund may seek
capital appreciation by investing in debt securities which its investment
manager believes have the potential for capital appreciation as a result of
improvement in the creditworthiness of the issuer. Small Cap will invest in
debt securities rated B or above by Moody's or S&P, or in securities which
are unrated if, in the investment manager's opinion, such securities are
comparable to securities rated B or above by Moody's or S&P. The fund will
not invest more than 5% of its assets in debt securities rated lower than BBB
or Baa.
Franklin Value Fund of Franklin Value Investors Trust ("Value"). Value is a
non-diversified mutual fund with an investment objective of long-term total
return. The fund seeks to achieve this objective by investing at least 65% of
its assets in the securities of companies that its investment manager
believes are undervalued. The securities in which Value may invest include
common and preferred stocks, warrants, secured and unsecured bonds, and
notes. While Value currently intends to invest primarily in domestic
securities, it may also invest in foreign securities. Income is a secondary
consideration of the fund, although it is not part of Value's investment
objective.
Value invests at least 65% of its assets in companies of various sizes,
including investments in small capitalization companies, that its investment
manager believes are selling substantially below the underlying value of
their assets or their private market value. Private market value is what a
sophisticated investor would pay for the entire company. The investment
manager may take into account a variety of factors in order to determine
whether to purchase or hold securities including: low price to earnings ratio
relative to market, industry group or earnings growth; low price relative to
book value or cash flow; valuable franchises, patents, trademarks, trade
names, distribution channels, or market share for particular products or
services, tax loss carry-forwards, or other intangibles that may not be
reflected in stock prices; ownership of understated or underutilized tangible
assets such as land, timber, or mineral; underutilized cash or investment
assets; and unusually high current income. These criteria and others, alone
and in combination, may identify companies that are attractive to financial
or strategic acquirers (i.e., takeover candidates). Purchases may include
companies in cyclical businesses, turnarounds, and companies emerging from
bankruptcy. Purchase decisions may also be influenced by company and its
insiders' stock buy-backs. Value may invest in companies that have relatively
small revenues, limited product lines, and a small share of the market for
their products or services.
Value may invest in convertible securities, which are, in general, debt
obligations or preferred stocks that may be converted within a specified
period of time into a certain amount of common stock of the same or a
different issuer. Value may also invest in convertible preferred stocks that
offer enhanced yield features, such as Preferred Equity Redemption Cumulative
Stock ("PERCS"), and in synthetic convertible securities.
With respect to foreign securities, Value may buy sponsored or unsponsored
ADRs, GDRs and EDRs. The fund may also purchase the securities of foreign
issuers directly in foreign markets, and may purchase the securities of
issuers in developing nations.
Value may invest in structured notes. Structured notes entitle their holders
to receive some portion of the principal or interest payments that would be
due on traditional debt obligations. A zero coupon bond is a simple form of
structured note. A structured note's performance or value may be linked to a
change in return, interest rate, or value at maturity of the change in an
identified or "linked" equity security, currency, interest rate index, or
other financial indicator. The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending upon changes in certain rates of interest or other external events.
Value may invest in mortgage-backed securities, including collateralized
mortgage obligations ("CMOs"), which represent direct or indirect
participation in, or are collateralized by and payable from, mortgage loans
secured by real property. In addition, the fund may buy asset-backed
securities, which represent participation in, or are secured by and payable
from, assets such as motor vehicle installment sale contracts, installment
loan contracts, leases of various types of real and personal property,
receivables from revolving credit (credit card) agreements, and other
categories of receivables. These securities are generally issued by trusts
and special purpose corporations.
The fund may invest up to 25% of its net assets at the time of purchase in
lower rated, fixed-income and convertible securities (those rated BB or lower
by S&P or Ba or lower by Moody's) and unrated securities of comparable
quality, which its investment manager believes possess intrinsic values in
excess of the current market prices of such securities. Lower rated
securities in which Value may invest include securities rated D, the lowest
rating category of S&P, or unrated securities of comparable quality. Debt
obligations rated D are in default and the payment of interest and/or
repayment of principal is in arrears. The fund may invest in zero coupon or
deferred interest securities and pay-in-kind bonds. The fund may also acquire
loan participations. For a description of the risks associated with investing
in high-yielding fixed income securities, including defaulted securities, see
"What are the Underlying Funds' Potential Risks?"
Some of the securities Value purchases are considered "restricted securities."
Restricted securities are securities with legal or contractual restrictions on
resale, including securities that are not registered under the 1933 Act.
Securities not registered under the 1933 Act may not be sold without first being
registered, unless there is an available exemption under the Act.
Franklin Real Estate Securities Fund of Franklin Real Estate Securities Trust
("Real Estate"). The investment objective of Real Estate is to maximize total
return. In connection with this objective, Real Estate will invest primarily in
the equity securities of companies operating in the real estate industry. Under
normal circumstances, at least 65% of the fund's total assets will be invested
in real estate securities, primarily equity real estate investment trusts
("REITs"). Real Estate may also invest in equity securities issued by home
builders and developers and in debt and convertible securities issued by REITs,
home builders, and developers.
"Real estate securities" include equity, convertible, and debt securities of
companies having the following characteristics and will be subject to the
following limitations:
1. Companies qualifying as a REIT for federal income tax purposes. In order
to qualify as a REIT, a company must derive at least 75% of its gross income
from real estate sources (rents, mortgage interest, gains from the sale of
real estate assets), and at least 95% from real estate sources, plus
dividends, interest and gains from the sale of securities. Real property,
mortgage loans, cash, and certain securities must comprise 75% of a company's
assets. In order to qualify as a REIT, a company must also make distributions
to shareholders aggregating annually at least 90% of its REIT taxable income.
2. Companies, such as home builders and developers, having at least 50% of
their assets related to, or deriving at least 50% of their revenues from, the
ownership, construction, management, or sale of residential, commercial, or
industrial real estate.
Real Estate will invest primarily in equity real estate securities of
companies listed on a securities exchange or over-the-counter markets. The
fund will invest more than 25% of its total assets in the real estate
industry as described above.
In addition to the fund's investments in real estate securities, the fund may
also invest up to 35% of its assets in debt or equity securities of issuers
engaged in businesses closely related to the real estate industry and
publicly traded on an exchange or in the over-the-counter market, including
companies whose products and services are closely related to the real estate
industry, such as manufacturers and distributors of building supplies;
financial institutions that issue or service mortgages, such as savings and
loan associations or mortgage bankers; and companies whose principal business
is unrelated to the real estate industry but who have significant real estate
holdings (at least 50% of their respective assets) believed to be undervalued
relative to the price of those companies' securities.
Real Estate may invest in convertible and debt securities. The fund will not
acquire such securities rated lower than B by Moody's or S&P or that are not
rated but are determined to be of comparable quality by its investment
manager. In addition, the fund does not intend to invest more than 10% of its
net assets in high risk, high yield convertible and debt securities. For a
description of the risks associated with investing in high-yielding fixed
income securities, see "What are the Underlying Funds' Potential Risks?"
Real Estate may invest in foreign securities not publicly traded in the U.S.
It is the fund's current intention to limit such investments to less than 5%
of the fund's net assets.
Mutual Shares Fund of Franklin Mutual Series Fund Inc. ("Mutual Shares"). The
principal objective of Mutual Shares is capital appreciation, which may
occasionally be short term. The secondary objective of the fund is income.
Mutual Shares pursues its objectives primarily through investments in common
stock and preferred stock as well as debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities). There are no preset limits as to the percentage
of the fund's portfolio which may be invested in equity securities, debt
securities (including junk bonds), or cash equivalents.
Although Mutual Shares may invest in securities from any size issuer, it will
tend to invest in securities of issuers with market capitalizations in excess
of $1 billion. The fund may invest in securities that are traded on U.S. or
foreign exchanges, NASDAQ national market system, or in the over-the-counter
market. The fund may invest in any industry sector but will not be
concentrated in any one industry. Debt securities in which Mutual Shares
invests (such as corporate and U.S. government bonds, debentures, and notes)
may or may not be rated by rating agencies such as Moody's or S&P, and, if
rated, such rating may range from the very highest to the very lowest,
currently C for Moody's and D for S&P. Mutual Shares has historically
invested in debt instruments issued by reorganizing or restructuring
companies, or companies which recently emerged from, or are facing the
prospect of a financial restructuring.
Mutual Shares also seeks to invest in the securities of domestic and foreign
companies involved in mergers, consolidations, liquidations, and
reorganizations or as to which there exist tender or exchange offers, and may
participate in such transactions. Although there are no restrictions limiting
the extent to which the fund may invest in such transactions, the fund
presently anticipates investing no more than 50% of its portfolio in such
investments. Mutual Shares from time to time may also purchase indebtedness
and participations therein, both secured and unsecured, of debtor companies
in reorganization or financial restructuring. Such indebtedness may be in the
form of loans, notes, bonds or debentures. Participations normally are made
available only on a nonrecourse basis by financial institutions, such as
banks or insurance companies, or by governmental institutions, such as the
Resolution Trust Corporation, the Federal Deposit Insurance Corporation, or
the Pension Benefit Guaranty Corporation or may include supranational
organizations such as World Bank.
Mutual Shares may also purchase trade and other claims against, and other
unsecured obligations of, such debtor companies, which generally represent
money due a supplier of goods or services to such company. Some corporate
debt securities, including indebtedness of debtor companies in reorganization
or financial restructuring, purchased by the fund may have very long
maturities. The length of time remaining until maturity is one factor its
investment manager considers in purchasing a particular indebtedness.
Indebtedness which represents indebtedness of the debtor company to a bank
are not securities of the banks issuing or selling them. Mutual Shares
purchases loans from national and state chartered banks as well as foreign
ones. The fund normally invests in senior indebtedness of the debtor
companies, although on occasion subordinated indebtedness may also be
acquired.
Mutual Shares may invest in securities representing interests in an
underlying pool of real estate mortgages ("mortgage-backed securities"). The
mortgage-backed securities which the fund may purchase may be issued or
guaranteed by the U.S. government, certain U.S. government agencies or
certain government sponsored corporations or organizations or by certain
private, non-government corporations, such as banks and other financial
institutions. Two principal types of mortgage-backed securities are
collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICs).
CMOs are debt securities issued by the entities listed above. The payment of
interest on the debt securities is dependent upon the scheduled payments on
the underlying mortgages and, thus, the CMOs are said to be "collateralized"
by the pool of mortgages. CMOs are issued in a number of classes or series
with different maturities. The classes or series are paid off completely in
sequence as the underlying mortgages are repaid. Certain of these securities
may have variable interest rates which adjust as interest rates in the
securities market generally rise or fall. Other CMOs may be stripped, which
means that only the principal or interest feature of the underlying security
is passed through to the fund.
REMICs, which were authorized under certain tax laws, are private entities
formed for the purpose of holding a fixed pool of mortgages. The mortgages
are, in turn, backed by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. Certain of these private-backed
securities are 100% collateralized at the time of issuance by securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
Among Mutual Shares' equity investments may be investments in shares issued
by REITs. A REIT is a pooled investment vehicle which purchases primarily
income-producing real estate or real estate related loans or other real
estate related interests. The pooled vehicle, typically a trust, then issues
shares whose value and investment performance are dependent upon the
investment experience of the underlying real estate related investments.
Mutual Shares may also invest in distressed mortgage obligations and other
debt secured by real property and may sell short securities it does not own
up to 5% of its assets. Further, the fund may purchase securities denominated
in any currency and generally expects currency risks will be hedged to the
extent that hedging is available.
Mutual Shares may invest in securities of non-U.S. issuers and in sponsored
or unsponsored depositary receipts or other securities representing interests
in securities of foreign issuers.
Mutual Shares generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of the issuer.
However, in certain circumstances when its investment manager perceives that
the fund may benefit, the fund may seek to influence or control management or
may invest in other entities that purchase securities for the purpose of
influencing or controlling management, such as investing in a potential
takeover or leveraged buyout or investing in other entities engaged in such
activities.
Mutual Discovery Fund of Franklin Mutual Series Fund Inc. ("Discovery"). The
principal objective of Discovery is long-term capital appreciation. Discovery
investment policies and strategies are virtually identical to those of Mutual
Shares, except that Discovery expects to invest to a greater degree in
smaller capitalized companies. Such companies are often not well known, may
often trade at a discount and may not be followed by institutions. Further,
Discovery expects that up to approximately 50% of its assets may be invested
in foreign securities. See "Mutual Shares Fund of Franklin Mutual Series Fund
Inc." above for the other investment strategies of this fund.
Fixed Income Funds
As described below, the following Underlying Funds are funds that invest
primarily in fixed income securities.
U.S. Fixed Income Funds
Franklin Short-Intermediate U.S. Government Securities Fund of Franklin
Investors Securities Trust ("Short-Intermediate"). The investment objective of
Short-Intermediate is to provide investors with as high a level of current
income as is consistent with prudent investment practices and preservation of
shareholders' capital. The fund intends to invest up to 100% of its net assets
in U.S. government securities. As a fundamental policy, Short-Intermediate must
invest at least 65% of its net assets in U.S. government securities. It is the
investment policy of the fund (which may be changed upon notice to shareholders)
to maintain the average dollar weighted maturity of its portfolio in a range of
two to five years. Within this range, the fund intends to emphasize an average
weighted maturity of 31/2 years or less.
Short-Intermediate may invest in obligations either issued or guaranteed by
the U.S. government and its agencies or instrumentalities including, but not
limited to: direct obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds; and obligations of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association, Banks for
Cooperatives (including Central Bank for Cooperatives), Federal Land Banks,
Federal Intermediate Credit Banks, Tennessee Valley Authority, Export-Import
Bank of the U.S., Commodity Credit Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage Corporation,
or National Credit Union Administration. Since inception, the assets of the
fund have been invested solely in direct obligations of the U.S. Treasury and
in repurchase agreements collateralized by U.S. Treasury obligations. The
level of income achieved by Short-Intermediate may not be as high as that of
other funds which invest in lower quality, longer-term securities. The fund
may invest in zero coupon bonds issued or guaranteed by the U.S. government
or its agencies or instrumentalities and in inflation-indexed securities
issued by the U.S. Treasury.
U.S. Government Securities Series of Franklin Custodian Funds, Inc. ("Government
Securities"). The investment objective of Government Securities is income
through investment in a portfolio limited to securities which are obligations of
the U.S. government or its instrumentalities. U.S. government securities
include, but are not limited to, U.S. Treasury bonds, U.S. Treasury notes, U.S.
Treasury bills, U.S. Treasury certificates of indebtedness, and securities
issued by instrumentalities of the U.S. government. Other than investments in
short-term U.S. Treasury securities or assets held in cash pending investment,
the assets of the fund are currently invested solely in obligations ("GNMAs") of
the Government National Mortgage Association ("Association"). GNMAs are
mortgage-backed securities representing part ownership of a pool of mortgage
loans. GNMAs differ from other bonds in that principal may be paid back on an
unscheduled basis rather than returned in a lump sum at maturity. Government
Securities will purchase GNMAs for which principal and interest are guaranteed.
The fund also purchases "adjustable rate" GNMAs and other types of securities
which may be issued with the Association's guarantee.
THE ASSOCIATION'S GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST ON GNMAS IS
BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. THE ASSOCIATION
MAY BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS UNDER
ITS GUARANTEE. OF COURSE, THIS GUARANTEE DOES NOT EXTEND TO THE MARKET VALUE
OR YIELD OF THE GNMAS OR THE NET ASSET VALUE OR PERFORMANCE OF THE FUND,
WHICH WILL FLUCTUATE DAILY WITH MARKET CONDITIONS.
Payments to holders of GNMAs, such as the fund, consist of the monthly
distributions of interest and principal less the Association's and issuers'
fees. The portion of the monthly payment which represents a return of
principal will be reinvested by Government Securities in securities which may
bear interest at a rate higher or lower than the obligations from which the
principal payment was received. When mortgages in the pool underlying a GNMA
are prepaid by borrowers or as a result of foreclosure, such principal
payments are passed through to the GNMA holders, such as the fund.
Accordingly, a GNMA's life is likely to be substantially shorter than the
stated maturity of the mortgages in the underlying pool. Because of such
variation in prepayment rates, it is not possible to accurately predict the
life of a particular GNMA.
Franklin Investment Grade Income Fund of Franklin Managed Trust ("Investment
Grade"). The objective of Investment Grade is to seek a maximum level of
income consistent with prudent exposure to risk. The fund seeks to achieve
its objective by investing in a diversified portfolio of debt securities,
most of which will be intermediate-term investment grade issues and
dividend-paying common and preferred stocks. At times, particularly during
periods when the yield curve is positive, the fund will endeavor to provide a
higher yield than that available from a money market mutual fund, while
attempting to avoid the potential risks to principal often associated with
both non-investment grade securities and longer-term instruments.
Investment Grade may invest in corporate debt obligations such as bonds,
notes, and debentures; obligations convertible into common stocks;
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities; obligations denominated in either U.S. dollars or foreign
currencies issued by foreign corporations and governments (including Canadian
provinces and their instrumentalities), and supranational entities;
commercial paper; and currency deposits or equivalents.
Under normal market conditions, at least 75% of the fund's portfolio will be
invested in debt securities that are rated in one of the four highest rating
categories or in unrated securities that are of comparable quality as
determined by its investment manager. Although Investment Grade may invest up
to 25% of its portfolio in securities that are not in the four highest rating
categories or determined to be of comparable quality, the fund will not
invest in any debt securities rated lower than B by Moody's or S&P or in any
equity securities of an issuer if a majority of the issuer's debt securities
are rated lower than B by Moody's or S&P. Similarly, the fund will not invest
in any unrated debt securities that the fund considers to be of lower
comparable quality than securities rated B by Moody's or S&P. Investment
Grade does not intend to invest more than 5% of its net assets in debt
securities rated below Baa by Moody's or BBB by S&P.
While the opinion of rating services is considered in selecting rated
securities for Investment Grade's portfolio, the investment manager relies
primarily on its own credit analysis, which includes a study of the existing
debt issuer's capital structure, ability to service debt and to pay
dividends, and the current trend of earnings for any company under
consideration for investment by the fund.
Under normal economic conditions, Investment Grade will invest at least 65%
of its assets in intermediate-term obligations. Intermediate-term obligations
in which the fund invests typically will have effective remaining maturities
of between two and ten years at the time of purchase. The remaining 35% may
be invested, to the extent available and permissible, in obligations with
maturities that are shorter than two years or longer than ten years at the
time of purchase.
Investment Grade may invest in collateralized obligations, which generally
are bonds issued by single purpose, stand-alone finance subsidiaries or
trusts of financial institutions, government agencies or instrumentalities,
investment bankers or other similar institutions, such as Collateralized
Automobile Receivables ("CARs") and CMOs. CARs are generally automobile loan
pass-through certificates issued by such institutions. All such
collateralized obligations will either be issued or guaranteed by a U.S.
government agency or instrumentality rated AAA by a nationally recognized
statistical rating agency. For a discussion of the risks involved in buying
these types of collateralized obligations, please see "What are some of the
Other Investment Policies and Strategies of, and Risks of an Investment in,
the Underlying Funds?" in the Appendix.
Using the criteria described above, Investment Grade may invest any portion of
its assets in debt securities issued by foreign corporations and governments and
their instrumentalities, and supranational entities. The fund may invest in
securities issued in any currency and may hold foreign currency to the extent
consistent with its objective and policies. Securities of issuers within a given
country may be denominated in the currency of that or another country, or in
multinational currency units.
Franklin's AGE High Income Fund of Franklin High Income Trust ("AGE"). AGE's
principal investment objective is to earn a high level of current income. As a
secondary objective, the fund seeks capital appreciation to the extent it is
possible and consistent with the fund's principal objective. AGE will generally
invest its assets in high yield, high risk, lower rated, fixed-income debt
securities and dividend-paying common or preferred stocks. Yield and expected
return are the primary criteria used by the fund in selecting portfolio
securities. AGE may invest in both fixed-income debt securities and instruments
(sometimes referred to as "corporate bonds") and dividend-paying common or
preferred stocks, and will seek to invest in whatever type of security is
offering the highest yield and expected total return without excessive risk at
the time of purchase. The fund may invest in both domestic and foreign
securities and instruments. AGE is also authorized to acquire loan participation
and other related direct or indirect bank debt obligations. It is the present
policy of the fund not to invest more than 5% of its total assets in companies
which have a record of less than three years' continuous operations; this policy
may be changed without the approval of shareholders.
When buying fixed-income debt securities, AGE may invest in investment grade or
lower grade securities depending upon prevailing market and economic conditions.
The fund may invest up to 100% of its portfolio in non-investment grade bonds,
which entail default and other risks greater than those associated with higher
rated securities. The fund will not invest in securities which are felt by its
investment manager to involve excessive risk. AGE may purchase zero coupon or
deferred interest securities and pay-in-kind bonds. Since a substantial portion
of the fund's portfolio at any particular time may consist of debt securities,
changes in the level of interest rates, among other things, will likely affect
the value of the fund's holdings and thus the value of its investment.
Rather than relying principally on the ratings assigned by rating services, the
investment analysis of securities under consideration for AGE's portfolio may
also include, among other things, consideration of relative values, based on
such factors as anticipated cash flow, interest or dividend coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements, and the issuer's changing
financial condition and public recognition of the change. It is the fund's
intent, however, not to purchase securities rated below CCC by S&P or Caa by
Moody's. With respect to unrated securities, it is the fund's intent not to
purchase securities which, in the view of its investment manager, would be
comparable to securities rated below B by Moody's or S&P. If a rating agency
changes the rating on an issue held in AGE's portfolio or the security goes into
default, AGE will consider that event in its evaluation of the overall
investment merits of that security but will not automatically sell the security.
For a description of these ratings, see the Appendix.
AGE may purchase defaulted debt securities if, in the opinion of its investment
manager, it appears likely that the issuer may resume interest payments or other
advantageous developments appear likely in the near term. The fund will not
invest more than 10% of its total assets (at the time of purchase) in defaulted
debt securities; this policy may be changed without shareholder approval.
For a description of the risks associated with investing in high yielding, fixed
income securities, including defaulted securities, see "What are the Underlying
Funds' Potential Risks?"
AGE may purchase foreign securities which are traded in the U.S. or purchase
ADRs. The fund may also purchase the securities of foreign issuers directly in
foreign markets and may purchase securities of U.S. issuers which are
denominated in foreign currency. Investments may be in securities of foreign
issuers, whether located in developed or undeveloped countries. The fund
presently has no intention of investing more than 10% of its net assets in
foreign securities not publicly traded in the U.S.
International Funds
As described below, the following Underlying Funds are funds that primarily
invest in equity and debt securities of non-U.S. companies and governments.
International Equity Funds
Mutual European Fund of Franklin Mutual Series Fund Inc. ("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 of Franklin Mutual Series Fund Inc." above for
additional information about the investment strategies of this fund.
Templeton Foreign Fund of Templeton Funds, Inc. ("Templeton Foreign"). The
investment objective of Templeton Foreign is long-term capital growth, which
it seeks to achieve through a flexible policy of investing in stocks and debt
obligations of companies and governments outside the U.S. Any income realized
will be incidental.
Although the fund generally invests in common stock, it may also invest in
preferred stocks and certain debt securities (which may include structured
investments), rated or unrated, such as convertible bonds and bonds selling
at a discount. The fund may, for temporary defensive purposes, invest without
limitation in U.S. government securities, bank time deposits in the currency
of any major nation and commercial paper, and purchase from banks or
broker-dealers Canadian or U.S. government securities with a simultaneous
agreement by the seller to repurchase them within no more than seven days at
the original purchase price plus accrued interest.
Templeton Foreign may purchase sponsored or unsponsored ADRs, EDRs, and GDRs.
The fund may invest no more than 5% of its total assets in securities issued
by any one company or government, exclusive of U.S. government securities.
Although the fund may invest up to 25% of its assets in a single industry, it
has no present intention of doing so. Templeton Foreign may not invest more
than 5% of its assets in warrants (exclusive of warrants acquired in units or
attached to securities) nor more than 10% of its assets in securities with a
limited trading market.
The fund is authorized to invest in medium quality or high-risk, lower
quality debt securities (which may include structured investments) that are
rated between BBB and CCC by S&P and between Baa and Caa by Moody's or, if
unrated, are of equivalent investment quality as determined by its investment
manager. As an initial policy, which may be changed by the fund's Board of
Directors without shareholder approval, the fund will not invest more than 5%
of its total assets in debt securities rated lower than BBB by S&P or Baa by
Moody's. Templeton Foreign may, from time to time, purchase defaulted debt
securities if, in the opinion of its investment manager, the issuer may
resume interest payments in the near future. The fund will not invest more
than 10% of its total assets in defaulted debt securities, which may be
illiquid.
Templeton Developing Markets Trust ("Developing Markets"). The investment
objective of Developing Markets is long-term capital appreciation. The fund
seeks to achieve this objective by investing primarily in equity securities
of issuers in countries having developing economic markets. It is currently
expected that under normal conditions, at least 65% of the fund's total
assets will be invested in developing market equity securities.
Developing Markets considers developing markets to be countries that are
generally considered to be developing or emerging countries by the
International Bank for Reconstruction and Development (more commonly referred
to as the World Bank) or the International Finance Corporation, as well as
countries that are classified by the United Nations or otherwise regarded by
their authorities as developing. Currently, the countries not in this
category include Ireland, Spain, New Zealand, Australia, the United Kingdom,
Italy, the Netherlands, Belgium, Austria, France, Canada, Germany, Denmark,
the U.S., Sweden, Finland, Norway, Japan, Iceland, Luxembourg, and
Switzerland. In addition, developing market equity securities means (i)
equity securities of companies the principal securities trading market for
which is a developing market country, as defined above, (ii) equity
securities, traded in any market, of companies that derive 50% or more of
their total revenue from either goods or services produced in developing
market countries or sales made in developing market countries or (iii) equity
securities of companies organized under the laws of, and with a principal
office in, a developing market country. "Equity securities" refers to common
stock, preferred stock, warrants, or rights to subscribe to or purchase such
securities and sponsored or unsponsored ADRs, EDRs, and GDRs. The fund will
at all times, except during defensive periods, maintain investments in at
least three countries having developing markets.
For capital appreciation, Developing Markets may invest up to 35% of its
total assets in debt securities (defined as bonds, notes, debentures,
commercial paper, CDs, time deposits, and bankers' acceptances and which may
include structured investments) which are rated at least C by Moody's or C by
S&P, or unrated debt securities deemed to be of comparable quality. As an
operating policy, which may be changed by the fund's Board of Trustees, the
fund will not invest more than 5% of its total assets in debt securities
rated lower than Baa by Moody's or BBB by S&P. For a description of the risks
associated with investing in high yielding, fixed income securities,
including defaulted securities, see "What are the Underlying Funds' Potential
Risks?"
Templeton Global Smaller Companies Fund, Inc. ("Smaller Companies"). The
investment objective of Smaller Companies is long-term capital growth,
primarily through investment in common stocks and all types of common stock
equivalents, including rights, warrants, and preferred stock, of companies of
various nations throughout the world. The fund seeks to achieve its objective
by investing primarily in securities of smaller companies globally. Under
normal circumstances, Smaller Companies will invest at least 65% of its total
assets in issuers domiciled in at least three different nations (one of which
may be the U.S.).
Consistent with its investment objective, the fund expects to invest 75% of
its portfolio in issuers whose individual market capitalizations would place
them (at the time of purchase) in the same size range as companies in
approximately the lowest 20% by total market capitalization of companies that
have equity securities listed on a U.S. national securities exchange or
traded in the NASDAQ system. Based on recent U.S. share prices, these
companies typically have individual market capitalizations of between
approximately $50 million and $1 billion. Because the fund is permitted to
apply the U.S. size standard on a global basis, it may invest in issuers that
might rank above the lowest 20% by total market capitalization in local
markets and, in fact, might in some countries rank among the largest
companies in terms of capitalization. The fund's Board of Directors has
adopted an operating policy under which Smaller Companies will not purchase
securities of companies with individual market capitalizations of greater
than $1 billion.
Smaller Companies may purchase sponsored or unsponsored ADRs, EDRs, and GDRs.
The fund may invest no more than 5% of its total assets in securities issued
by any one company or government, exclusive of U.S. government securities.
Although the fund may invest up to 25% of its assets in a single industry,
there is no present intention of doing so. The fund may invest up to 5% of
its total assets in warrants and invest up to 10% of its total assets in
restricted securities, securities with a limited trading market, and
securities which are not otherwise readily marketable.
Smaller Companies is authorized to invest in medium quality or high risk,
lower quality debt securities (which may include structured investments). As
an operating policy which may be changed by the Board of Directors without
shareholder approval, the fund will not invest more than 5% of its total
assets in debt securities rated lower than BBB by S&P or Baa by Moody's or,
if unrated, of equivalent investment quality as determined by its investment
manager. The fund may, from time to time, purchase defaulted debt securities
if, in the opinion of the investment manager, the issuer may resume interest
payments in the near future. The fund will not invest more than 10% of its
total assets in defaulted debt securities, which may be illiquid. For a
description of the risks associated with investing in high yielding, fixed
income securities, including defaulted securities, see "What are the
Underlying Funds' Potential Risks?"
Templeton Foreign Smaller Companies Fund of Franklin Templeton International
Trust ("Foreign Smaller"). The principal investment objective of Foreign
Smaller is to seek to provide long-term growth of capital. Under normal
market conditions, Foreign Smaller invests at least 65% of its total assets
in a diverse international portfolio of equity securities that trade on
markets in countries other than the U.S. and which are issued by companies
(i) domiciled in countries other than the U.S., or (ii) that derive at least
50% of their revenues or pre-tax income from activities outside of the U.S.
Thus it is possible, although not anticipated, that up to 35% of the fund's
assets could be invested in U.S. companies.
In selecting portfolio securities, Foreign Smaller attempts to take advantage
of the difference between economic trends and the anticipated performance of
securities and securities markets in various countries. Foreign Smaller may
invest in the securities of issuers in, but not limited to, the following
countries: Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada,
Chile, Colombia, Denmark, Finland, France, Germany, Greece, Hong Kong, India,
Indonesia, Italy, Japan, South Korea, Luxembourg, Malaysia, Mexico, the
Netherlands, New Zealand, Norway, Peru, the Philippines, Portugal, Russia,
Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, and the
United Kingdom. It is currently expected that under normal conditions, at
least 65% of the fund's total assets will be invested in securities of
foreign issuers in at least three of the countries listed herein.
Under normal market conditions, Foreign Smaller's assets are substantially
invested in equity securities consisting of common and preferred stock, bonds
or preferred stock convertible into common stock, warrants and securities
representing certain underlying international securities such as ADRs and
EDRs.
The fund invests predominantly in smaller capitalization foreign equity
securities, i.e., securities with a market capitalization of $1 billion or
less at the time of purchase of issuers located in, or deriving a significant
portion of their revenues from, or for which the principal securities trading
market is in any foreign country, including developing market countries
("foreign smaller capitalization equity securities"). Under normal market
conditions, Foreign Smaller will have at least 65% of its portfolio in
foreign smaller capitalization equity securities.
Smaller capitalization issuers include relatively new or unseasoned companies
which are in their early stages of development, or small companies positioned
in new and emerging industries where the opportunity for rapid growth is
expected to be above average. There are greater risks associated with a fund
that invests a substantial portion of its net assets in smaller
capitalization equity securities. For a description of these risks, see "New
or Unseasoned Companies" and "Small Capitalization Stocks" in the Appendix.
Up to 35% of Foreign Smaller's assets may be invested in bonds, fixed-income
debt securities and synthetic securities rated Baa or better by Moody's or
BBB or better by S&P, or that are not rated but determined by its investment
manager to be of comparable quality. The fund may invest up to 5% of its
portfolio in non-investment grade bonds issued by both U.S. and foreign
issuers, which entail default and other risks greater than those associated
with higher rated securities. In the event the rating on an issue held in the
fund's portfolio is lowered by a rating service, the change will be
considered by the fund in its evaluation of the overall investment merits of
that security but will not necessarily result in an automatic sale of the
security. For a description of these ratings, see the Appendix.
The fund may seek capital appreciation by investing in these debt securities.
Appreciation in the value of these investments may result from changes in
relative foreign currency exchange rates, interest rates or improvement in
the creditworthiness of an issuer. The receipt of income from these debt
securities is incidental to the fund's investment objective of growth of
capital. These debt obligations consist of U.S. and foreign government
securities and corporate debt securities, including Samurai and Yankee bonds,
Eurobonds and depositary receipts.
The fund may invest up to 10% of its net assets in warrants, including
warrants that are not listed on an exchange. The fund may also invest up to
35% of its assets in synthetic convertible securities. Synthetic convertible
securities are not considered equity securities for purposes of the fund's
65% investment policy. For a description of synthetic convertible securities,
please see "Convertible Securities, including Enhanced and Synthetic
Convertible Securities" in the Appendix.
Although Foreign Smaller will not invest more than 25% of its assets in any
one industry or the securities issued by any foreign government, the fund may
invest more than 25% of its assets in the securities of issuers in one or
more countries. Consistent with this policy, the fund may invest up to 30% of
its assets in securities issued by Hong Kong companies.
Some of the countries in which the fund invests may not permit direct
investment. Investments in these countries may only be permitted through
government approved investment vehicles. Investing through such vehicles may
involve duplicative or layered fees or expenses and may, as well, be subject
to limitations under the 1940 Act.
The fund may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and/or invest a portion of its assets in high quality
money-market instruments. Any decision to substantially withdraw from the
equity market is reviewed by the fund's Board of Trustees. Money market
instruments in which the fund may invest include, but are not limited to, the
following instruments of U.S. or foreign issuers: government securities;
commercial paper; bank CDs; bankers' acceptances; and repurchase agreements
secured by any of the foregoing. All such securities will be rated A-1 or A-2
by S&P or P-1 or P-2 by Moody's or, if unrated, determined by the investment
manager to be of comparable quality.
Templeton Greater European Fund of Templeton Global Investment Trust
("Greater European"). The investment objective of Greater European is
long-term capital appreciation. The fund seeks to achieve its objective by
investing primarily in equity securities of Greater European Companies. The
term "Greater European Company" means a company (i) that is organized under
the laws of, or with a principal office and domicile in, a country in Greater
Europe, (ii) for which the principal equity securities trading market is in
Greater Europe, or (iii) that derives at least 50% of its revenues or profits
from goods produced or sold, investments made, or services performed in
Greater Europe or that has at least 50% of its assets situated in Greater
Europe. The term "Greater Europe" means Western, Central and Eastern Europe
(including Ukraine, Belarus, Latvia, Lithuania and Estonia) and Russia.
Greater European may invest without limit in emerging or developing market
countries. As a non-fundamental policy, Greater European will limit
investments in Russian securities to 5% of its total assets. Under normal
market conditions, the fund will invest at least 75% of its total assets in
the equity securities of Greater European Companies. The balance of the
fund's assets will be invested in (i) debt securities issued by Greater
European Companies or issued or guaranteed by Greater European government
entities, (ii) equity securities and debt obligations of issuers outside
Greater Europe, and (iii) short-term and medium-term debt securities.
Equity securities in which Greater European may invest are common stock,
preferred stock, securities convertible into or exchangeable for such
securities, warrants or rights to subscribe to or purchase such securities,
and sponsored or unsponsored ADRs, EDRs, and GDRs. For capital appreciation,
the fund may invest up to 25% of its total assets in debt securities (defined
as bonds, notes, debentures, commercial paper, time deposits, and bankers'
acceptances, and which may include structured investments) which are rated in
any rating category by Moody's or S&P or which are unrated by any rating
agency. Such securities may include high-risk, lower quality debt securities.
As an operating policy, which may be changed by the fund's Board of Trustees,
the fund will not invest more than 5% of its total assets in debt securities
rated lower than Baa by Moody's or BBB by S&P. Greater European may invest up
to 25% of its total assets in "Brady Bonds." The investment manager will
actively manage Greater European's assets in response to market, political,
and general economic conditions, and will seek to adjust the fund's
investments based on its perception of which investments would best enable
the fund to achieve its investment objective.
The fund may not invest more than 5% of its assets in warrants (exclusive of
warrants acquired in units or attached to securities) or more than 15% of its
assets in securities with a limited trading market. The fund will limit its
investment in restricted securities, other than Rule 144A securities, to 10%
of its total assets and will limit its investment in all restricted
securities, including Rule 144A securities, to 15% of its total assets.
Templeton Pacific Growth Fund of Franklin Templeton International Trust
("Pacific Growth"). The principal investment objective of Pacific Growth is
to provide long-term growth of capital. Under normal market conditions, the
fund invests at least 65% of its total assets in equity securities that trade
on markets in the Pacific Rim and are issued by companies (i) domiciled in
the Pacific Rim or (ii) that derive at least 50% of their revenues or pre-tax
income from activities in the Pacific Rim.
For purposes of this policy, the countries in the Pacific Rim are Australia,
China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, South Korea, and Thailand. It is currently expected
that under normal conditions, at least 65% of the fund's total assets will be
invested in securities of foreign issuers in at least three of those
countries.
Although Pacific Growth will not invest more than 25% of its assets in any
one industry or the securities issued by any foreign government, the fund may
invest more than 25% of its assets in the securities of issuers in one or
more countries. Consistent with this policy, Pacific Growth may invest up to
30% of its assets in securities issued by Hong Kong companies.
Pacific Growth may invest up to 35% of its assets in the securities of
issuers domiciled outside of the Pacific Rim. These investments may include
securities of issuers (i) in countries that are not located in the Pacific
Rim but are linked by tradition, economic markets, cultural similarities, or
geography to countries in the Pacific Rim; and (ii) located elsewhere in the
world which have operations in the Pacific Rim or which stand to benefit from
political and economic events in the Pacific Rim.
Under normal conditions, the fund's assets are substantially invested in
equity securities consisting of common and preferred stock, bonds or
preferred stock convertible into common stock, warrants, and securities
representing certain underlying international securities such as ADRs.
Pacific Growth may, from time to time, hold significant cash positions until
suitable investment opportunities are available, consistent with its policy
on short-term investments.
Up to 35% of Pacific Growth's total assets may be invested in investment
grade bonds, fixed-income debt securities, and synthetic securities rated Baa
or better by Moody's or BBB or better by S&P or that are unrated but
determined to be of comparable quality. The fund may seek capital
appreciation by investing in these debt securities. Debt obligations in which
the fund may invest include U.S. and foreign government securities and
corporate debt securities, including Samurai and Yankee bonds, Eurobonds, and
depositary receipts. The issuers of these debt securities may or may not be
domiciled in the Pacific Rim.
Pacific Growth may invest up to 10% of its net assets in warrants, including
warrants that are not listed on an exchange. The fund may invest up to 35% of
its assets in synthetic convertible securities. Synthetic convertible
securities are not considered equity securities for purposes of the fund's
65% investment policy.
Pacific Growth may hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest a portion of its assets in
high-quality money market instruments to the same extent and subject to the
same rating requirements as Foreign Smaller.
Templeton Latin America Fund of Templeton Global Investment Trust ("Latin
America"). The investment objective of Latin America is long-term capital
appreciation. The fund seeks to achieve its objective by investing primarily in
equity and debt securities of issuers in the following Latin American countries:
Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Ecuador,
El Salvador, French Guyana, Guatemala, Guyana, Honduras, Mexico, Nicaragua,
Panama, Paraguay, Peru, Surinam, Trinidad/Tobago, Uruguay, and Venezuela. Latin
America may invest without limit in emerging market or developing countries.
Under normal market conditions, Latin America will invest at least 65% of its
total assets in equity and debt securities of issuers in the countries named
above. The balance of the fund's assets will be invested in (i) equity
securities and debt obligations of companies and government entities of
countries other than those named above, and (ii) short-term and medium-term debt
securities.
Latin America may invest in the same types of equity securities, and for
capital appreciation may invest without limit in the same types of debt
securities, as Greater European. Latin America will not invest more than 5%
of its total assets in debt securities rated lower than Baa by Moody's or BBB
by S&P. The investment manager will actively manage Latin America's assets in
response to market, political and general economic conditions, and will seek
to adjust Latin America's investments based on its perception of which
investments would best enable the fund to achieve its investment objective.
The fund may not invest more than 5% of its assets in warrants (exclusive of
warrants acquired in units or attached to securities) or more than 15% of its
assets in securities with a limited trading market. Latin America will limit
its investment in restricted securities, other than Rule 144A securities, to
10% of its total assets and will limit its investments in all restricted
securities, including Rule 144A securities, to 15% of its total assets.
Latin America may invest without limit in certain debt obligations
customarily referred to as "Brady Bonds," which are created through the
exchange of existing commercial bank loans to sovereign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds are not considered U.S. government securities and are considered
speculative. Brady Plan debt restructurings have been implemented to date in
several countries, including Argentina, Brazil, Bulgaria, Costa Rica, the
Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, the Philippines,
Uruguay, and Venezuela (collectively, the "Brady Countries"). It is expected
that other countries will undertake a Brady Plan debt restructuring in the
future, including Panama, Peru, and Poland.
Many of the Brady Bonds have been issued relatively recently and,
accordingly, do not have a long payment history. They may be collateralized
or uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds which have the same
maturity as the Brady Bonds. Interest payments on these Brady Bonds generally
are collateralized on a one year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed-rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest
payments, but generally are not collateralized. Brady Bonds are often viewed
as having three or four valuation components: (i) the collateralized
repayment of principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the
Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have
principal repayments at final maturity collateralized by U.S. Treasury zero
coupon bonds (or comparable collateral denominated in other currencies)
and/or interest coupon payments collateralized on a 14-month (for Venezuela)
or 12-month (for Argentina) rolling-forward basis by securities held by the
Federal Reserve Bank of New York as collateral agent.
International Fixed-Income Funds
Franklin Templeton Hard Currency Fund of Franklin Templeton Global Trust
("Hard Currency"). The investment objective of Hard Currency is to protect
against depreciation of the U.S. dollar relative to other currencies. The
fund seeks to achieve its objective by investing in high-quality money market
instruments (and forward contracts) denominated in foreign major currencies
which historically have experienced low rates of inflation and which, in the
view of its investment manager, are pursuing economic policies conducive to
continued low rates of inflation in the future and currency appreciation
versus the U.S. dollar over the long-term. Such currencies are often referred
to as "hard currencies" and such economic policies are often referred to as
"sound money" policies.
Hard Currency endeavors, to the maximum extent practicable, to maintain
foreign currency (non-U.S. dollar) exposure with respect to 100% of its net
assets at all times. The fund may invest without limitation in U.S.
dollar-denominated money market instruments in combination with forward
contracts (calling for the future acquisition of foreign currencies in
exchange for U.S. dollars) for the purpose of obtaining an investment result
that is substantially equivalent to a direct investment in foreign
currency-denominated instrument.
Under normal market conditions, Hard Currency will not maintain exposure to a
single foreign currency in excess of 50% of its total assets.
Subject to specific restrictions described more fully below, the fund may
invest in money market instruments and forward contracts denominated in the
following currencies (the "major currencies"): Australian dollar, Belgian
franc, British pound sterling, Canadian dollar, Danish krone, Netherlands
guilder, European Currency Unit ("ECU"), French franc, German mark, Italian
lira, Japanese yen, New Zealand dollar, Spanish peseta, Swedish krona, Swiss
franc, and U.S. dollar. The currencies of various countries may be added to
or deleted from the foregoing list of major currencies when, in the opinion
of the fund's investment manager, world social, economic, financial or
political conditions so warrant.
Hard Currency will attempt to maintain a weighted average effective maturity of
120 days or less and will acquire only money market instruments that have an
effective maturity, at the time of purchase, of one year or less. These
securities include floating or variable rate obligations that may have actual
maturities of over one year but that have interest rates which adjust at
periodic intervals. The effective maturity of each floating or variable rate
obligation within the fund's portfolio will be based upon these periodic
adjustments. Because the fund invests primarily in short-term securities which
are excluded from the calculation of portfolio turnover rate, the portfolio
turnover rate for the fund is usually minimal.
The issuers of money market instruments in which Hard Currency may invest may
include governments of, and financial institutions, corporations or other
entities located in or organized under the laws of, any country. The fund may
also invest in money market securities issued by supranational organizations
such as: The World Bank, which was chartered to finance development projects in
member countries; the European Economic Community, which is a twelve-nation
organization engaged in cooperative economic activities; the European Coal and
Steel Community, which is an economic union of various European nations' steel
and coal industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment, and provide
technical assistance to member nations in the Asian and Pacific regions.
Hard Currency invests only in instruments which are considered by its
investment managers to be of high quality, comparable to those (1) rated AAA
or AA (A-1 for commercial paper) by S&P or Aaa or Aa (P-1 for commercial
paper) by Moody's or (2) issued by companies having an outstanding unsecured
debt issue currently rated within the above rating categories by S&P or
Moody's.
Money market instruments in which the fund may invest include short-term U.S.
government securities, bank CDs, time deposits, bankers' acceptances,
commercial paper, floating and variable rate notes, repurchase agreements
secured by U.S. government securities, and short-term liquid instruments
issued by foreign governments and supranational organizations. The fund will
invest in government securities only when the investment manager is satisfied
that the credit risk with respect to the issuer is minimal.
Securities issued by the governments of foreign countries may include direct
obligations and obligations guaranteed by the governments of the foreign
countries. These obligations may have fixed, floating or variable rates of
interest.
Under normal market conditions, Hard Currency may invest up to 25% of its
assets in obligations of companies engaged in the financial services
industry, including banks (U.S. and non-U.S. banks and their branches),
savings and loan associations, insurance companies, and their holding
companies. These investments may include bank obligations, such as CDs, time
deposits, and bankers' acceptances.
Templeton Global Bond Fund of Templeton Income Trust ("Global Bond"). The
investment objective of Global Bond is current income with capital
appreciation and growth of income. The fund seeks to achieve its objective
through a flexible policy of investing primarily in debt securities of
companies, governments, and government agencies of various nations throughout
the world, as well as preferred stock, common stocks which pay dividends,
income-producing securities which are convertible into common stock of such
companies, and sponsored and unsponsored ADRs, EDRs, and GDRs. The fund may
invest in "when-issued" securities and collateralized mortgage obligations.
Under normal circumstances, the fund will invest 65% of its total assets in
issuers domiciled in at least three different nations (one of which may be
the U.S.). The fund's investments in common stocks will emphasize companies,
in various countries and industries, which pay dividends and may offer
prospects for further growth in dividend payments and capital appreciation.
Global Bond may invest in any debt security (which may include structured
investments), including securities rated in any category by S&P or Moody's
and securities which are unrated by any rating agency. As an operating
policy, the fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S&P or Ba by Moody's. The fund will not
invest more than 10% of its total assets in defaulted debt securities, which
may be illiquid. For a description of the risks associated with investing in
high yielding, fixed income securities, including defaulted securities, see
"What are the Underlying Funds' Potential Risks?" Investments in commercial
paper are limited to obligations rated Prime-1 by Moody's or A-1 by S&P, or
if unrated, issued by companies having an outstanding debt issue currently
rated Aaa or Aa by Moody's or AAA or AA by S&P. The average maturity of the
debt securities in the fund's portfolio will fluctuate depending upon its
investment manager's judgment as to future interest rate changes.
Although Global Bond may invest up to 25% of its assets in a single industry,
there is no present intention of doing so. As a non-fundamental policy
approved by the fund's Board of Trustees, the investment manager will select
securities for purchase by the fund from many industries that it believes to
be productive and beneficial.
The fund may invest up to 5% of its total assets in securities that may not
be resold without registration under applicable law ("restricted
securities"). The fund may invest up to 10% of its total assets in restricted
securities and other securities which are not restricted but which are not
readily marketable (i.e., trading in the security is suspended or, in the
case of unlisted securities, market makers do not exist or will not entertain
bids or offers).
Franklin Global Government Income Fund of Franklin Investors Securities Trust
("Global Government"). The fund's principal investment objective is to
provide high current income, consistent with preservation of capital, with
capital appreciation as a secondary consideration.
Global Government seeks to achieve its objective by investing primarily in
securities issued by domestic and foreign governments and their political
subdivisions. Investments will be selected to provide a high current yield
and currency stability, or a combination of yield, capital appreciation or
currency appreciation consistent with the fund's objective.
As a global fund, Global Government may invest in securities issued in any
currency and may hold foreign currency. Under normal circumstances, at least
65% of the fund's assets will be invested in government securities of issuers
located in at least three countries, one of which may be the U.S. Securities
of issuers within a given country may be denominated in the currency of
another country, or in multinational currency units such as the European
Currency Unit ("ECU").
Global Government is authorized to invest in securities issued by domestic
and foreign governments and their political subdivisions, including the U.S.
government, its agencies, and authorities or instrumentalities ("U.S.
government securities") and supranational organizations (as described below)
and in securities issued by foreign and domestic corporations, banks, and
other business organizations. There are no restrictions or limitations on
investments in obligations of the U.S., or of corporations chartered by the
U.S. Congress as federal government instrumentalities.
Under normal economic conditions, at least 65% of Global Government's total
assets will be invested in fixed-income securities such as bonds, notes and
debentures. Some of the fixed-income securities may be convertible into
common stock or be traded together with warrants for the purchase of common
stocks, although the fund has no current intention of converting such
securities into equity or holding them as equity upon such conversion. The
remaining 35% may be invested, to the extent available and permissible, in
equity securities, foreign or domestic currency deposits or equivalents such
as short-term U.S. Treasury notes or repurchase agreements.
Global Government may invest in debt securities with varying maturities.
Under current market conditions, it is expected that the dollar-weighted
average maturity of the fund's investments will not exceed 15 years.
Generally, the portfolio's average maturity will be shorter when, in the
opinion of its investment manager, interest rates worldwide or in a
particular country are expected to rise, and longer when interest rates are
expected to fall.
Other fixed-income securities of both domestic and foreign issuers in which
the fund may invest include preferred and preference stock and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment trust certificates
and conditional sales contracts. For a discussion of these latter three
categories of investments, see "Equipment Related Instruments" in the
Appendix. These fixed-income securities may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participation based on revenues, sales or
profits; or the purchase of common stock in a unit transaction (where an
issuer's debt securities and common stock are offered as a unit). Global
Government will limit its investments in warrants, valued at the lower of
cost or market, to 5% of the fund's net assets or to warrants attached to
securities.
Global Government is also authorized to invest in debt securities of
supranational entities denominated in any currency. A supranational entity is
an entity designated or supported by the national government of one or more
countries to promote economic reconstruction or development. Examples of
supranational entities include, among others, the World Bank, the European
Investment Bank and the Asian Development Bank. The fund may, in addition,
invest in debt securities denominated in ECU of an issuer in any country
(including supranational issuers). Global Government is further authorized to
invest in "semi-governmental securities," which are debt securities issued by
entities owned by either a national, state or equivalent government or are
obligations of a government jurisdiction that are not backed by its full
faith and credit and general taxing powers.
Global Government may invest in obligations of domestic and foreign banks
which, at the date of investment, have total assets (as of the date of their
most recently published financial statements) in excess of one billion
dollars (or foreign currency equivalent at then current exchange rates).
Global Government is also authorized to acquire loan participations.
Global Government will allocate its assets among securities of various
issuers, geographic regions, and currency denominations in a manner that is
consistent with its objective based upon relative interest rates among
currencies, the outlook for changes in these interest rates, and anticipated
changes in worldwide exchange rates. In considering these factors, a
country's economic and political conditions such as inflation rate, growth
prospects, global trade patterns and government policies will be evaluated.
Global Government's assets will be invested principally within Australia,
Canada, Japan, New Zealand, the U.S. and Western Europe, and in securities
denominated in the currencies of these countries or denominated in
multinational currency units such as the ECU. The fund may also acquire
securities, including fixed-income obligations of governments, government
agencies and corporations, and currency in less developed countries and in
developing countries. The investment manager does not currently expect the
fund's investments in less developed and developing countries to exceed 20%
of the fund's net assets.
Global Government may invest in higher yielding, higher risk, lower rated
debt obligations that are rated at least B by Moody's or S&P or, if unrated,
are at least of comparable quality as determined by the investment manager;
such investments will be less than 35% of the fund's net assets. For a
description of these ratings, see the Appendix. For a description of the
risks associated with investing in high yielding, fixed income securities,
see "What are the Underlying Funds' Potential Risks?" Many debt obligations
of foreign issuers, especially developing market issuers, are not rated by
U.S. rating agencies and their selection depends on the investment manager's
internal analysis.
Under normal market conditions, Global Government will have at least 65% of
its total assets invested in securities issued or guaranteed by domestic and
foreign governments. Securities issued by central banks that are guaranteed
by their national governments are considered to be government securities.
Bonds of foreign governments or their agencies which may be purchased by the
fund may be less secure than those of U.S. government issuers.
During periods when the investment manager believes that the fund should be in a
temporary defensive position, the fund may have less than 25% of its assets
concentrated in foreign government securities and may invest instead in U.S.
government securities. U.S. government securities which may be purchased by the
fund may include (i) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance: U.S. Treasury bills, U.S.
Treasury notes, and U.S. Treasury bonds, all of which are backed by the full
faith and credit of the U.S. government; and (ii) obligations issued or
guaranteed by U.S. government agencies or instrumentalities, some of which are
backed by the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage Association); some
of which are supported by the right of the issuer to borrow from the U.S.
government (e.g., obligations of Federal Home Loan Banks); and some of which are
backed only by the credit of the issuer itself (e.g., obligations of the Student
Loan Marketing Association).
Global Government may invest no more than 10% of the value of its net assets
in restricted securities (other than certain Rule 144A securities), or in
other securities which, in the opinion of the fund's investment manager, may
be otherwise illiquid.
Franklin Templeton German Government Bond Fund of Franklin Templeton Global
Trust ("German Bond"). The investment objective of German Bond is to seek,
over the long-term, total return through investment in a managed portfolio of
German government bonds.
Under normal market conditions, German Bond will invest between 65% and 100%
of its total assets in debt obligations issued or guaranteed by the Federal
Republic of Germany, its agencies, instrumentalities and political
subdivisions ("German government obligations"); and securities backed
exclusively by loans to public sector institutions, known as Offentliche
Pfandbriefe or global Pfandbriefe. The German government obligations or
Pfandbriefe in which German Bond invests are denominated in the German mark
and are rated, at the time of purchase, triple A by a U.S. nationally
recognized rating service, such as S&P or Moody's, or, if unrated, are
considered by the fund's investment managers to be of comparable quality to
triple A rated instruments.
Consistent with its investment objective, German Bond may also invest up to
35% of its total assets in (i) German mark-denominated bonds and other debt
instruments issued by sovereign governments other than the Federal Republic
of Germany and by supranational organizations (such as the World Bank) that
are rated, at the time of purchase triple A by a U.S. nationally recognized
rating service, such as S&P or Moody's, or which, if unrated, are considered
by the fund's investment managers to be of comparable quality; and (ii) cash
and money market instruments denominated in the German mark which are rated
at time of purchase A-1+ by S&P and/or P-1 by Moody's, or which, if unrated,
are considered by the fund's investment managers to be of comparable high
quality.
For liquidity purposes, German Bond may invest up to 5% of its total assets
in U.S. dollar denominated cash and money market instruments, such as U.S.
Treasury bills.
It is also possible that German Bond may occasionally hold significant cash
or cash equivalents denominated in German marks until suitable investment
positions are available. In order to preserve its favorable tax status, the
fund may regularly hold 25% or less of its assets in obligations issued or
guaranteed by the Federal Republic of Germany even while holding 65% or more
of its total assets in German government obligations (as defined above). In
addition, as a temporary measure, German Bond may reduce its investment in
German government obligations and/or increase its investment in U.S.
government and agency securities from time to time to preserve its favorable
tax status.
The rate of exchange between the U.S. dollar and the German mark fluctuates.
As a result, German Bond generally will experience gains and losses
attributable to those fluctuations. German Bond does not generally position
hedge or otherwise attempt to limit its exposure to German mark currency risk
and, therefore, there is the risk of currency fluctuations.
Changes in German market interest rates will affect the market value of the
fund. When German market interest rates rise, the market value of German
Bond's securities generally will decline. Conversely, when German market
interest rates decline, the market value of the fund's securities generally
will rise. German Bond's investment managers will actively manage the fund's
portfolio maturity structure in an attempt to achieve positive returns for
the fund over time from changes in interest rates.
It is anticipated that under normal market conditions, German Bond's weighted
average portfolio maturity will be at least five years. For temporary,
defensive purposes, however, the fund's weighted average portfolio maturity
may be less than five years.
German Bond's investment managers invest the fund's assets on the basis of a
number of factors, including, (i) the current level of interest rates on
German government obligations of various maturities and (ii) its view of
future movements of those interest rates. In determining German Bond's
maturity structure, the fund's investment managers consider many factors
pertaining to the German economy, including the current stage of the economic
cycle, government fiscal and monetary policy, inflation expectations, the
relationship of interest rates of varying maturities (i.e., the slope of the
yield curve), currency market outlook, and economic growth prospects within
Germany and around the world.
German government obligations generally are considered by rating agencies to
be among the highest credit quality debt instruments worldwide. In addition,
the Bundesbank (the German central bank) generally is viewed as among the
most disciplined and ardent central banks in the world in its policies of
fighting domestic inflation and protecting the international value of the
German mark.
Liquidity in the German government bond market is considered by the fund's
investment managers to be very high.
Certain German government obligations are issued or otherwise guaranteed by
the Federal Republic of Germany. These obligations carry the explicit full
faith and credit backing of the German government and include direct
obligations of the government (Bunds), as well as certain government agency
issues, such as the German Unity Fund (Fonds Deutsche Einheit), established
to help pay for the reconstruction of former East Germany's economy, and the
Treuhandanstalt, established to facilitate the privatization of assets of
former East Germany.
Other German government obligations are guaranteed by their issuing agency,
instrumentality or political subdivision, but do not carry the explicit full
faith and credit guarantee of the German government. German Bond will invest
only in such obligations that the fund's investment managers consider to be
of credit quality substantially equivalent to direct obligations of the
German government. Issuers presently satisfying this criterion include the
German Federal Railways (Bundesbahn), the German Post Office (Bundespost),
the Kreditanstalt fur Wiederaufbau ("KFW"), as well as certain of the 16
separate federal states (Lander) of which Germany is comprised.
For a discussion of the primary risk factors associated with investment in
German government obligations, including interest rate, currency and German
economic risk, please see "German Government Bonds" in the Appendix.
In the event of an extraordinary political or world development which, in the
view of the fund's investment managers, threatens the social or political
stability of Germany or the viability of the German government, German Bond
may invest in U.S. government securities and U.S. dollar-denominated cash
equivalents or otherwise hedge its German bond and currency risk, without
limitation, but only for temporary, defensive purposes.
German Government may invest in time deposits of commercial banks having
short-term deposit ratings of A-1+ by S&P and/or P-1 by Moody's, but will
limit its investment in time deposits maturing in more than seven days.
Natural Resources Funds
Franklin Gold Fund ("Gold"). The principal investment objective of Gold is
capital appreciation. Gold's secondary objective is to provide current income
through the receipt of dividends or interest from its investments. The
payment of dividends may be a consideration when the fund purchases
securities.
In seeking to achieve its objectives, Gold has adopted a fundamental policy
of concentrating its investments in securities of issuers engaged in mining,
processing or dealing in gold or other precious metals, such as silver,
platinum, and palladium, which means that the fund will invest at least 25%
of its total assets in such securities. Under normal circumstances, at least
65% of the value of the fund's total assets will be invested in securities of
issuers engaged in gold operations, including securities of gold mining
finance companies, as well as operating companies with long, medium, or
short-life mines.
Gold will normally invest in common stocks and securities convertible into
common stocks, such as convertible preferred stock, convertible debentures,
convertible rights and warrants, all of which may be traded on a securities
exchange or over-the-counter. The fund may invest in debt obligations and
preferred stocks which are convertible within a specified period of time into
a certain quantity of the common stock of the same or a different issuer. In
seeking income or appreciation or in times when it is felt that a
conservative investment policy is in order, the fund may also purchase
preferred stocks and debt securities, such as notes, bonds, debentures or
commercial paper (short-term debt securities of large corporations), and may
place some of its cash reserves in securities of the U.S. government and its
agencies, various bank debt instruments or repurchase agreements
collateralized by U.S. government securities. Gold may invest in fixed-income
and convertible securities rated below investment grade by Moody's or S&P or
that are unrated but considered by its investment manager to be of comparable
quality.
Because of the fund's policy of investing primarily in securities of
companies engaged in gold mining, a substantial part of Gold's assets
generally is invested in securities of companies domiciled or operating in
one or more foreign countries. The fund generally has invested more than 50%
of its total assets in the securities of corporations located outside the
U.S. While the fund intends to acquire securities of foreign issuers only
where there are public trading markets for such securities, such investments
may tend to reduce the liquidity of the fund's portfolio in the event of
internal problems in such foreign countries or deteriorating relations
between the U.S. and such countries.
The fund will ordinarily buy securities that are traded in the U.S. or buy
sponsored or unsponsored ADRs, EDRs or GDRs. The fund may also buy the
securities of foreign issuers directly in foreign markets so long as, in the
investment manager's judgment, an established public trading market exists.
As a means of seeking its principal objective of capital appreciation and
when it is felt to be appropriate as a possible hedge against inflation, Gold
may invest a portion of its assets in gold bullion and may hold a portion of
its cash in foreign currency in the form of gold coins. The ability of the
fund to make such investments may be further restricted by the securities
laws and regulations in effect from time to time in the states where the
fund's shares are qualified for sale. If otherwise consistent with the fund's
objectives, it may invest up to 10% of its assets in gold bullion and gold
coins.
Gold's assets will be invested in gold bullion at such times as the prospects
of such investments are, in the opinion of its investment manager, attractive
in relation to other possible investments. Transactions in gold bullion by
the fund are negotiated with principal bullion dealers unless, in its
investment manager's opinion, more favorable prices are otherwise obtainable.
Prices at which gold bullion is purchased or sold include dealer mark-ups or
mark-downs, insurance expenses, assay charges, and shipping costs for
delivery to a custodian bank. Such costs and expenses may be a greater or
lesser percentage of the price from time to time, depending on whether the
price of gold bullion decreases or increases. Since gold bullion does not
generate any investment income, the only source of return to the fund on such
investment will be from any gains realized upon its sale, and negative return
will be realized, of course, to the extent the fund sells its gold bullion at
a loss.
Franklin Natural Resources Fund of Franklin Strategic Series ("Natural
Resources"). The investment objective of Natural Resources is to seek to
provide high total return. The fund's total return consists of both capital
appreciation and current dividend and interest income. The fund seeks to
achieve its objective by investing at least 65% of its total assets in
securities issued by companies which own, produce, refine, process and market
natural resources, as well as those that provide support services for natural
resources companies (i.e., those that develop technologies or provide
services or supplies directly related to the production of natural
resources). These companies are concentrated in the natural resources sector
that includes, but is not limited to, the following industries: integrated
oil; oil and gas exploration and production; gold and precious metals; steel
and iron ore production; aluminum production; forest products; farming
products; paper products; chemicals; building materials; energy services and
technology; and environmental services.
Natural Resources at all times, except during temporary defensive periods,
seeks to maintain at least 65% of its total assets invested in securities
issued by companies in the natural resources sector and will be concentrated
in the natural resources sector. Natural Resources invests in common stocks
(including preferred or debt securities convertible into common stocks),
preferred stocks, and debt securities. The mixture of common stocks, debt
securities, and preferred stocks varies based upon the investment manager's
assessment as to whether investments in each category will contribute to
meeting the fund's investment objective.
Natural Resources may invest, without limit, in investment grade fixed-income
securities. Investment grade securities are securities rated in one of the
four highest rating categories of a national recognized rating service, such
as Moody's or S&P, and also include unrated securities that are comparable in
quality to securities that have been rated investment grade. The four highest
rating categories are Aaa, Aa, A and Ba for Moody's and AAA, AA, A and BBB
for S&P. The fund's commercial paper investments at the time of purchase will
be rated "A-1" or "A-2" by S&P or "Prime-1" or "Prime-2" by Moody's or, if
not so rated, will be of comparable quality as determined by its investment
manager. Natural Resources may also invest up to 15% of its total assets at
the time of purchase in lower rated fixed-income securities (those rated BB
or lower by S&P or Ba or lower by Moody's) and unrated securities of
comparable quality. Natural Resources will not acquire securities rated lower
than B by Moody's or S&P.
Natural Resources may invest in the securities of issuers both within and
outside the U.S., including emerging market countries. The fund may purchase
foreign securities that are traded in the U.S. or in foreign markets or
purchase sponsored or unsponsored ADRs. Investments of the fund may be
denominated in foreign currencies. The fund's investment manager will attempt
to independently accumulate and evaluate information with respect to the
issuers of the underlying securities of sponsored and unsponsored ADRs to
attempt to limit the fund's exposure to the market risk associated with such
investments. For purposes of Natural Resources' investment policies,
investments in ADRs will be deemed to be investments in the equity securities
of the foreign issuers into which they may be converted.
Under normal conditions, it is anticipated that the percentage of assets
invested in U.S. securities will be higher than that invested in securities
of any other single country. It is possible that at times the fund may have
50% or more of its total assets invested in foreign securities.
Natural Resources is permitted to invest up to 35% of its assets in
securities of issuers that are outside the natural resources sector. Such
investments will consist of common stocks, debt securities or preferred
stocks and REITs and will be selected to meet the fund's investment objective
of providing high total return. These securities may be issued by either U.S.
or non-U.S. companies, governments, or governmental instrumentalities. Some
of these issuers may be in industries related to the natural resources sector
and, therefore, may be subject to similar risks.
The fund may invest in debt securities issued or guaranteed by foreign
governments. Such securities are typically denominated in foreign currencies
and are subject to the currency fluctuation and other risks of foreign
securities investments. The foreign government securities in which Natural
Resources intends to invest generally will consist of obligations issued by
national, state, or local governments or similar political subdivisions.
Foreign government securities also include debt obligations of supranational
entities, including international organizations designed or supported by
governmental entities to promote economic reconstruction or development and
international banking institutions and related government agencies. Examples
include the International Bank of Reconstruction and Development (the World
Bank), the European Investment Bank, the Asian Development Bank, and the
Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in
multinational currency units. An example of a multinational currency unit is
the European Currency Unit. A European Currency Unit represents specified
amounts of the currencies of certain of the 12-member states of the European
Economic Community. Debt securities of quasi-governmental agencies are issued
by entities owned by either a national or local government or are obligations
of a political unit that is not backed by the national government's full
faith and credit and general taxing powers. Foreign government securities
also include mortgage-related securities issued or guaranteed by national or
local governmental instrumentalities, including quasi-governmental agencies.
Other Investment Policies of the Underlying Funds
Options and Financial Futures. Certain of the Underlying Funds may use
certain investment techniques, all of which may be dependent upon a
prediction of the future direction of various financial barometers. In this
regard, Equity, Small Cap, Real Estate, Gold, Mutual Shares, Discovery,
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.
German Government may use futures, option contracts on futures, and OTC
options on a temporary basis to maintain its ongoing exposure to the German
mark and to German government obligations. However, it does not currently
intend to enter into currency futures or options thereon. Only under
extraordinary circumstances will the fund employ forwards, futures and
options for hedging purposes.
Mutual Shares', 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.
The options and futures transactions of many of the Underlying Funds, as
described above, have limited purposes. For example, as to options and
futures, Gold and Value, and as to futures only, Global Bond, Pacific Growth
and Foreign Smaller may only engage in such activities for hedging purposes
or other appropriate risk management purposes. Real Estate may only engage in
options and futures transactions, and Pacific Growth and Foreign Smaller may
only engage in options transactions for hedging purposes or to increase
income to such funds. Equity may only engage in options and futures
transactions for hedging purposes or to accommodate cash flows. Investment
Grade may purchase and sell put and call options on interest rate futures
contracts solely for hedging purposes. Mutual Shares, 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 all of the Underlying Funds will be accomplished so
that no fund is considered to be a commodity pool operator under the laws
governing the trading of commodities. In this regard, the activities of the
Underlying Funds will be limited so that if an Underlying Fund engages in
futures transactions for other than bona fide hedging purposes, such
Underlying Fund does not enter into a futures transaction if, immediately
thereafter, the sum of the amount of initial margin deposits and premiums
paid for such open futures options would exceed 5% of the Underlying Fund's
total assets, after taking into account unrealized profits and unrealized
losses on such contracts it has entered into; provided however, that, in the
case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5%. In addition, a
number of the Underlying Funds have committed to limit their options and
futures transactions to various percentages.
For a further description of these techniques, see the SAI.
Interest Rate Futures and Options thereon. Value, Pacific Growth, Foreign
Smaller, Mutual Shares, Discovery, European, Global Government and Natural
Resources may enter into interest rate futures contracts and options thereon.
Investment Grade may purchase options on interest rate futures. Interest rate
futures contracts are contracts for the future delivery of U.S. government
securities and index-based futures contracts. The value of these instruments
changes in response to changes in the value of the underlying security or
index, which depend primarily on prevailing interest rates.
Currency Futures Contracts and Options thereon. Equity, Small Cap, Pacific
Growth, Foreign Smaller, Natural Resources, Mutual Shares, Discovery,
European, Developing Markets, Greater European, Latin America, Global Bond,
Global Government and Hard Currency may enter into futures contracts on
currencies. A futures contract on currency is an agreement to buy or sell
currency at a specified price during a designated month.
These funds may also buy and sell put and call options on currency futures
contracts. A put option purchased by the fund would give it the right to
assume a position as the seller of a futures contract. A call option
purchased by the fund would give it the right to assume a position as the
buyer of a futures contract. The fund is required to pay a premium for a put
or call option on a futures contract, but is not required to take any actions
under the contract. If the option cannot be profitably exercised before it
expires, the fund's loss will be limited to the amount of the premium and any
transaction costs.
Options on Foreign Currencies. AGE, Pacific Growth, Foreign Smaller, Natural
Resources, Mutual Shares, Discovery, 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.
Forward Currency Exchange Contracts. AGE, Mutual Shares, Discovery, European,
Pacific Growth, Foreign Smaller, Natural Resources, Hard Currency, Global
Bond, Global Government, Greater European, German Government, 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.
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.
Interest Rate Swaps. AGE and Global Government may participate in interest
rate swaps. An interest rate swap is the transfer between two counterparties
of interest rate obligations, one of which has an interest rate fixed to
maturity while the other has an interest rate that changes in accordance with
changes in a designated benchmark (e.g., London Interbank Offered Rate
(LIBOR), prime, commercial paper, or other benchmarks). AGE intends to
participate in interest rate swaps with regard to obligations held in its
portfolio. To the extent AGE does not own the underlying obligation, it will
maintain, in a segregated account with its custodian, cash or securities
having an aggregate value equal to the amount of the fund's outstanding swap
obligation.
Options, futures, options on futures, forward currency exchange contracts,
interest rate swaps, currency swaps, CARs, and CMOs are considered
"derivative securities." For additional information about these investment
techniques, see the SAI. Investments in these instruments involve certain
risks. For a discussion of these risks, see "What are the Underlying Funds'
Potential Risks?" located elsewhere in this prospectus and "How does the Fund
Invests its Assets?" in the SAI.
Tax Considerations. The Underlying Funds' investments in options, futures,
forward contracts, foreign currencies and securities, and other complex
securities are subject to special tax rules that may affect the amount,
timing or character of the income earned by the funds and distributed to you.
These special tax rules are discussed in the "Additional Information on
Distributions and Taxes" section of the SAI.
WHAT ARE THE UNDERLYING FUNDS' POTENTIAL RISKS?
Generally. If the securities owned by an Underlying Fund increase in value,
the value of the shares of the Underlying Fund will increase. Similarly, if
the securities owned by an Underlying Fund decrease in value, the value of
the shares of the Underlying Fund will also decline. Such increases and
decreases will be reflected in the performance of the Underlying Funds as
well as the funds. The value of the shares of the Growth Target Fund will
tend to increase and decrease to a greater degree than those of the other
funds due to the increased emphasis on a more aggressive Underlying Fund mix.
Similarly, the value of the shares of the Moderate Target Fund will tend to
increase and decrease to a greater degree than the shares of the Conservative
Target Fund.
Common Stocks. To the extent an Underlying Fund's investments consist of
common stocks, a decline in the market, expressed for example by a drop in
any securities index that is based on equity securities, such as the Dow
Jones Industrials or the Standard & Poor's 500 average, may also be reflected
in declines in the Underlying Fund's share price. The value of stock markets
has increased and decreased in the past. These changes are unpredictable.
Debt Securities. To the extent an Underlying Fund's investments consist of
fixed-income securities, changes in interest rates will affect the value of
the fund's portfolio and its share price. Rising interest rates, which often
occur during times of inflation or a growing economy, are likely to have a
negative effect on the value of of such Underlying Fund. Interest rates have
increased and decreased in the past. These changes are unpredictable.
High Yield Securities. An investment in an Underlying Fund that has a policy
of investing in higher yielding, higher risk fixed-income securities is
subject to a higher degree of risk than is present with an investment by such
fund in higher rated, lower yielding securities.
The market value of high yield lower-quality, fixed-income securities tends
to reflect individual developments affecting the issuer to a greater degree
than the market value of higher-quality securities, which react primarily to
fluctuations in the general level of interest rates. Lower-quality securities
also tend to be more sensitive to economic conditions than higher-quality
securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
an Underlying Fund's portfolio defaults, the Underlying Fund may have
unrealized losses on the security, which may lower the fund's Net Asset
Value. Defaulted securities tend to lose much of their value before they
default. Thus, the Underlying Fund's Net Asset Value may be adversely
affected before an issuer defaults. In addition, the Underlying Fund may
incur additional expenses if it must try to recover principal or interest
payments on a defaulted security. For additional information on the risks of
high yield, fixed-income securities, see the Appendix.
Foreign Securities. Investments in foreign securities involve additional
risks, not generally associated with investments in U.S. securities. These
risks include the possibility of expropriation, extraordinary taxation by the
foreign country, adverse fluctuations in foreign currencies which are not
favorable compared to the U.S. dollar, political or social instability of the
countries where the foreign issuers are located or where the exchange on
which an Underlying Fund purchased such securities is located, and/or future
unfavorable diplomatic developments between the U.S. and the foreign
countries where the issuers of the fund's foreign investments are located or
where the exchanges on which the fund purchased securities are located. There
is always the possibility of an Underlying Fund's assets being confiscated by
foreign governments or others. In addition, there may be less publicly
available information about foreign issuers and foreign companies may not be
subject to auditing, accounting, and financial reporting standards comparable
to those applicable to U.S. companies.
With respect to investments in developing markets, the small size,
inexperience, and limited volume of trading on securities markets in certain
developing countries may make a fund's investments in developing countries
illiquid and more volatile than investments in more developed countries, and
the fund may be required to establish special custody or other arrangements
before making certain investments in those countries. The economies of
developing countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries
with which they trade. In many developing markets, there is less government
supervision and regulation of business and industry practices, stock
exchanges, brokers, and listed companies than in the U.S. There is an
increased risk, therefore, of uninsured loss due to lost, stolen, or
counterfeit stock certificates. For additional risks relating to investment
in developing markets, please see the Appendix.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries are generally more expensive than in the U.S.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements
have been unable to keep pace with the volume of securities transactions,
making it difficult to conduct such transactions. Delays in settlement could
result in temporary periods when assets of a fund are uninvested and no
return is earned thereon. The inability of a fund to make intended security
purchases due to settlement problems could cause the fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to the fund due to
subsequent declines in value of the portfolio security or, if the fund has
entered into a contract to sell the security, could result in possible
liability to the purchaser.
Options and Futures. Options and futures may fail as hedging techniques where
the price movements of the securities underlying the options and futures do
not follow the price movements of the Underlying Fund's securities which are
subject to the hedge. The loss from investing in futures transactions is
potentially unlimited. Gains and losses on investments in options and futures
depend on the investment manager's ability to predict correctly the direction
of securities markets, interest rates, and other economic factors. Also, a
liquid secondary market for any particular option or future may not be
available when the investment manager wishes to "close out" a position in an
option or future. In such case, the Underlying Fund will likely be unable to
control losses by closing its position.
Currency Transactions. Currency transactions, such as forward currency exchange
contracts, currency futures and options on such futures, options on currencies,
and currency swaps are subject to different risks than other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments. These can result in losses to a fund if it is unable to deliver
or receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
Interest Rate Swaps. Interest rate swaps are generally entered into to permit
the party seeking a floating rate obligation the opportunity to acquire such
obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed rate obligation the opportunity
to acquire such a fixed rate obligation, also frequently at a price lower
than is available in the capital markets. The success of such a transaction
depends in large part on the availability of fixed rate obligations at a low
enough coupon rate to cover the cost involved.
Natural Resources. There are a number of risks associated with investing in
the natural resources sector, including gold. Certain commodities are subject
to limited pricing flexibility as a result of supply and demand factors.
Others are subject to broad price fluctuations, reflecting the volatility of
certain raw materials' prices and the instability of supplies of other
resources. Further, many companies operate in areas of the world where they
are subject to unstable political environments, currency fluctuations, and
inflationary pressures.
Real Estate Securities. The risks associated with investing in real estate
securities include declines in the value of real estate, risks related to
general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, variations in rental income,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates. The value of securities of companies which
service the real estate industry also will be affected by such risks.
In addition, equity REITs will be affected by changes in the value of the
underlying property owned by the trusts, while a mortgage real estate
investment trust will be affected by the quality of the properties to which
it has extended credit. Equity and mortgage real estate investment trusts are
dependent upon the REIT's management skill, may not be diversified, and are
subject to the risks of financing projects. REITs are also subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under
the Code and to maintain exemption from the 1940 Act. By investing in REITs
indirectly, a shareholder will bear not only his proportionate share of the
expenses of the fund, but also, indirectly, similar expenses of the REITs.
WHO MANAGES THE FUND?
The Board. The Board oversees the management of the Trust and elects its
officers. The officers are responsible for the Trust's day-to-day operations.
The Board also monitors the Trust to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Investment Manager. Advisers manages the fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. Advisers also provides asset allocation services by allocating the
fund's assets among the Underlying Funds. It is wholly owned by Resources, a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Advisers or other direct or indirect wholly-owned
subsidiaries of Resources are the investment managers of the Underlying
Funds. Together, Advisers and its affiliates manage over $239 billion in
assets. Please see "Investment Advisory, Asset Allocation and Other Services"
and "Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the Trust's Code of Ethics.
Management Team. The team responsible for the day-to-day management of each
fund's portfolio is Donald P. Gould and Seymour R. Singer since 1996.
Donald P. Gould
Portfolio Manager of Advisers
Mr. Gould holds a Master of Business Administration degree from the Harvard
Business School and a Bachelor of Arts degree in Economics from Pomona
College. He is 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 Advisers
Mr. Singer is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Economics and Psychology from the University of California at Los
Angeles. Prior to joining the Franklin Templeton Group in 1996, Mr. Singer
was a portfolio analyst for The Carmack Group, Inc. He is a member of several
securities industry-related associations.
Investment Advisory and Asset Allocation Agreement. Under the investment
advisory and asset allocation agreement, Advisers provides general advisory
services. Such services include monitoring the Underlying Funds in order to
determine whether they are investing their assets in a manner that is
consistent with the asset classes targeted for investment for each fund by
Advisers. Advisers also provides asset allocation advice and administrative
services to each fund under the investment advisory and asset allocation
agreement. While Advisers provides general investment advisory and
administrative services to each fund without charge, it provides asset
allocation services to each fund for a monthly fee equivalent to an annual
rate of 0.25% of the average daily net assets of each fund. The fee is
computed at the close of business on the last business day of each month.
Management Fees. Advisers has agreed in advance to limit its asset allocation
fee and/or make certain payments to reduce the fund's direct operating
expenses so that each fund's total direct operating expenses, including Class
Rule 12b-1 expenses, do not exceed 0.75% for Class I and 1.50% for Class II.
Advisers may end this agreement at any time upon notice to the Board.
Each fund, as a shareholder in the Underlying Funds, will indirectly bear its
proportionate share of any management fees and other expenses paid by the
Underlying Funds. See the SAI for more information on these fees. The
investment manager and the management fee of each of the Underlying Funds are
set forth below as an annual percentage rate of such fund's net assets:
UNDERLYING FUND MANAGER FEE RATE
Equity Advisers 0.625%1
Growth Advisers 0.625%2
Utilities Advisers 0.625%2
Small Cap Advisers 0.625%3
Value Advisers 0.750%4
Real Estate Advisers 0.625%5
Mutual Shares Franklin Mutual 0.60%
Advisers, Inc.
Discovery Franklin Mutual 0.80%
Advisers, Inc.
European Franklin Mutual 0.80%
Advisers, Inc.
Short-Intermediate Advisers 0.625%1
Government Securities Advisers 0.625%2
Investment Grade Advisers 0.50%6
AGE Advisers 0.625%1
Templeton Foreign Templeton Global 0.75%7
Advisors Limited ("TGAL")
Developing Markets Templeton Asset Management 1.25%
Ltd. - Hong Kong Branch
UNDERLYING FUND MANAGER FEE RATE
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,*
German Government Advisers; TICI (sub-adviser) 0.55%*
Gold Advisers 0.625%1
Natural Resources Advisers 0.625%5
1 .625% of the month end net assets of the fund up to $100 million, reduced
to .50% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million.
2 .625% of the month end net assets of the fund up to $100 million, reduced
to .50% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million up to
$10 billion, further reduced to .44% of such net assets in excess of $10
billion up to $12.5 billion, further reduced to .42% of such net assets in
excess of $12.5 billion up to $15 billion, further reduced to .40% of such
net assets in excess of $15 billion up to $17.5 billion, further reduced to
.38% of such net assets in excess of $17.5 billion up to $20 billion, and
further reduced to .36% in excess of $20 billion.
3 .625% of the average daily net assets of the fund up to $100 million, .50%
of the average daily net assets of the fund over $100 million up to $250
million, .45% of the average daily net assets of the fund over $250 million
up to $10 billion, .44% of the average daily net assets of the fund over $10
billion up to $12.5 billion, .42% of the average daily net assets of the fund
over $12.5 billion up to $15 billion, and .40% of the average daily net
assets of the fund over $15 billion.
4 .75% of average daily net assets up to $500 million, .625% of average
daily net assets over $500 million up to $1 billion, and .50% of average
daily net assets over $1 billion.
5 .625% of the average daily net assets of the fund up to $100 million, .50%
of the average daily net assets of the fund over $100 million up to $250
million, .45% of the average daily net assets of the fund over $250 million
up to $10 billion, .44% of the average daily net assets of the fund over $10
billion up to $12.5 billion, .42% of the average daily net assets of the fund
over $12.5 billion up to $15 billion, and .40% of the average daily net
assets of the fund over $15 billion.
6 .50% of average daily net assets up to $500 million, .45% of average daily
net assets over $500 million up to $1 billion, and .40% of average daily net
assets over $1 billion.
7 .75% of the average daily net assets of the fund up to the first $200
million, reduced to a fee of .675% of such average daily net assets in excess
of $200 million up to $1.3 billion, and further reduced to a fee of .60% of
such average daily net assets in excess of $1.3 billion.
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.
*TICI is entitled to receive from Advisers a sub-advisory fee; the
sub-advisory fees payable by Advisers have no effect on the fees payable by
the Underlying Funds to Advisers. As to Foreign Smaller and Pacific Growth,
TICI receives from Advisers a fee equal to an annual rate of the value of
each fund's average daily net assets as follows: .50% of such assets up to
$100 million; .40% of such assets over $100 million up through $250 million;
.30% of such assets over $250 million up through $500 million; and .25% of
such assets over $500 million. As to Hard Currency and German Government,
TICI receives from Advisers a fee equal to an annual rate of .25% of the
value of each fund's average daily net assets. As to Global Government, TICI
receives from Advisers a fee equal to an annual rate of the value of the
fund's assets as follows: .35% of such assets up to $100 million; .25% of
such assets over $100 million up through $250 million; and .20% of such
assets over $250 million.
Operating Expenses. Each fund pays its own operating expenses. These expenses
include Advisers' fees associated with the provision of asset allocation
services; taxes, if any; custodian, legal and auditing fees; the fees and
expenses of Board members who are not members of, affiliated with, or
interested persons of Advisers; fees of any personnel not affiliated with
Advisers; insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the fund's Net Asset Value; and printing and other
expenses that are not expressly assumed by Advisers.
Portfolio Transactions. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
does the Fund Buy Securities for its Portfolio?" in the SAI for more
information.
Administrative Services. FT Services provides certain administrative services
and facilities for the fund at no charge. Please see "Investment Advisory,
Asset Allocation and Other Services" in the SAI for more information.
The Rule 12b-1 Plans
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses
of activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class I purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class II plan, the fund may pay Distributors up to 0.75% per year
of Class II's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class II
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class II
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
TAXES
How Do Taxes Affect the Fund?
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997. This new law makes sweeping changes in the Code. Because many of
these changes are complex, and only indirectly affect the fund and its
distributions to you, they are discussed in the SAI. Changes in the treatment
of capital gains and Individual Retirement Accounts ("IRAs"), however, are
discussed in this section.
Taxation of the Fund and the Underlying Funds' Investments
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The fund is treated as a separate entity for federal income tax purposes.
Each fund and Underlying Fund has elected and intends to continue to qualify
as a regulated investment company under Subchapter M of the Code. By
distributing all of its income and meeting certain other requirements
relating to the sources of its income and diversification of its assets, each
fund will generally not be liable for federal income or excise taxes.
A fund receives income in the form of income dividends paid by the Underlying
Funds in which it invests and from any direct investments. This income, less
the expenses incurred in operations, is the fund's net investment income. A
fund may also receive capital gain distributions from the Underlying Funds in
which it invests and realize capital gains upon the redemption of shares of
the Underlying Funds. The fund's net investment income and realized capital
gains will be distributed to shareholders as described below.
Some of the Underlying Funds' investments in complex securities as described
in the section "How Do the Underlying Funds Invest Their Assets?" are subject
to special tax rules. The effect of these rules may be to accelerate income,
defer losses, convert capital gains and losses into ordinary gains and
losses, and to convert long-term capital gains and losses into short-term
capital gains and losses within the Underlying Funds. These rules may also
cause the Underlying Funds to recognize income and make distributions to the
funds prior to their receipt of cash payments. The Underlying Funds'
investments in certain foreign securities which meet the Code definition of a
Passive Foreign Investment Company ("PFIC") may also subject the Underlying
Funds to an income tax and interest charge on their investments. In these
ways, these special tax rules may affect the amount, timing or character of
the income earned by the funds, and distributed to you. These rules are
discussed in more detail in the "Additional Information on Distributions and
Taxes" section of the SAI.
How Do Taxes Affect Your Investment?
Taxes on Distributions
Distributions from a fund will be taxable, whether you take them in cash or
additional shares. Distributions declared in December to shareholders of
record in that month and paid in January are taxable as if they were paid on
December 31.
Distributions paid from net investment income and short-term capital gain
will be taxable as ordinary dividends. Distributions paid from long-term
capital gain will be taxable as long-term capital gain, regardless of how
long you have held your shares in the fund. Any distributions paid in excess
of the fund's earnings will generally be treated as non-taxable returns of
capital. Dividends paid from interest earned by the fund on its direct
investments in U.S. government obligations may be given special tax-free
status on your state income tax return, subject in some states to the fund
satisfying minimum investment requirements.
Tax Treatment of Capital Gain Distributions Under the Taxpayer Relief Act of
1997
The Taxpayer Relief Act of 1997 creates a category of long-term capital gain
for individuals that will be taxed at new lower tax rates. For investors who
are in the 28% or higher federal income tax brackets, these gains will be
taxed at a maximum of 20%. For investors who are in the 15% federal income
tax bracket, these gains will be taxed at a maximum of 10%. Capital gain
distributions will qualify for these new maximum tax rates, depending on when
the fund's securities were sold and how long they were held by the fund
before they were sold. Investors who want more information on holding periods
and other qualifying rules relating to these new rates should review the
expanded discussion in the SAI, or should contact their personal tax advisors.
The fund will advise you in its annual information reporting at calendar
year-end of the amount of its capital gain distributions which will qualify
for these maximum federal tax rates. For corporate shareholders, a portion of
the dividends paid by the fund may qualify for the corporate
dividends-received deduction. The amount so qualified depends upon the
aggregate amount of dividends received by the Underlying Funds from domestic
(U.S.) corporations, and upon other limitations which are discussed in the
"Additional Information on Distributions and Taxes" section of the SAI.
Distributions to Retirement Plans
Fund distributions received by your qualified retirement plan, such as a
Section 401(k) or IRA, are generally tax-deferred; this means that you are
not required to report fund distributions on your income tax return when paid
to your plan, but, rather, when your plan makes payments to you.
Tax Treatment of Individual Retirement Accounts Under the Taxpayer Relief Act
of 1997
The Taxpayer Relief Act of 1997 creates two new IRAs which will be available
to the fund's investors beginning on January 1, 1998.
The new "Roth IRA" will permit tax free distributions of account balances if
the assets have been invested for five years or more, and the distributions
meet certain qualifying restrictions. Investors filing as single taxpayers
who have adjusted gross incomes of $95,000 or more, and investors filing as
joint taxpayers with adjusted gross incomes of $150,000 or more may find
their participation in this IRA to be restricted.
The new Education IRA is intended to help parents fund their children's
post-secondary school education. Parents or others may contribute up to $500
annually to an education IRA on behalf of any child under age 18. This IRA is
subject to the same adjusted gross income limits as the Roth IRA above, and
there are other contribution restrictions that may apply. The education IRA
earnings accumulate tax free, and assets that have accumulated in the IRA may
be distributed tax free when used to pay qualified higher education expenses.
Both new IRAs are subject to special rules and conditions that must be
reviewed by the investor when opening a new account. Additional information
is available from our Retirement Plan Services.
Redemptions and Exchanges of Your Shares
If you redeem any of your shares in the fund, or exchange your shares in the
fund for shares of another Franklin Templeton fund, you will generally have a
capital gain or loss that must be reported on your tax return. Any loss you
realize on the redemption or exchange of your fund shares, held for six
months or less, will be treated as a long-term capital loss to the extent of
any long-term capital gains distributions you received on these shares.
If you exchange shares that you have held for 90 days or less for shares of
another Franklin Templeton Fund, special tax rules apply. In calculating your
gain or loss on the exchange, these rules may require you not to include as
part of your cost the sales charge you paid at the time you purchased your
fund shares. You will, however, be permitted to add the amount of sales
charge disallowed to the cost basis of the shares you received in the
exchange.
Annual Information Returns
The funds will inform you at calendar year-end of the amount and source of
the dividends and distributions paid to you.
Additional Tax Considerations
"Buying a Dividend" - If you buy shares before a dividend distribution date,
you will pay the full price for the shares and then receive a portion of the
price back in the form of a taxable distribution.
"State Taxes" - You should contact your tax advisor to determine whether
state or local income, intangible or other taxes will apply to your
investment in the fund or to distributions or redemption proceeds you receive
from the fund. You should also understand that because each of the funds
invests primarily in the Underlying Funds, rather than in direct obligations
of the U.S. government and its territories, the funds do not expect to pay
dividends which qualify for exemption from state income tax.
"Foreign Taxes" - The Underlying Funds may be subject to foreign withholding
taxes on income from their investments. The funds will not be permitted to
elect to "pass through" to you the amount of foreign taxes paid by the
Underlying Funds on their foreign investments. Your respective share of these
foreign taxes will, therefore, be netted against your share of the fund's
other gross income in arriving at the net investment income that the fund
distributes to you.
"Non-U.S. Investors" - You should consult with your tax advisor on potential
U.S. and non-U.S. income, estate or other taxes (including U.S. income tax
withholding) on your investment in the fund or on dividends or distributions
paid to you by a fund.
The foregoing information is intended to summarize important tax rules that
may affect your investment in the funds. See the Section entitled "Additional
Information on Distributions and Taxes" in the Statement of Additional
Information for a more complete discussion of these rules and other tax
matters.
HOW IS THE TRUST ORGANIZED?
The Trust is an open-end management investment company, commonly called a
mutual fund. It was organized as a Delaware business trust on October 2,
1995, and is registered with the SEC. Each fund offers two classes of shares:
Conservative Target Fund - Class I and Conservative Target Fund - Class II,
Moderate Target Fund - Class I and Moderate Target Fund - Class II, and
Growth Target Fund - Class I and Growth Target Fund - Class II. Additional
series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A
meeting may also be called by the Board in its discretion or by shareholders
holding at least 10% of the outstanding shares. In certain circumstances, we
are required to help you communicate with other shareholders about the
removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
Opening Your Account
To open your account, 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 fund's minimum
investments are:
To open a regular, non-retirement
account .......................................... $1,000
To open an IRA, IRA Rollover,
Roth IRA, or Education IRA ....................... $ 250*
To open a custodial account for a minor
(an UGMA/UTMA account)............................ $ 100
To open an account with an
automatic investment plan ........................ $ 50**
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
AS A PERCENTAGE OF TO 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 $100,000 ............... 4.50% 4.71% 3.75%
$100,000 but less
than $250,000 ............... 3.50% 3.63% 2.80%
$250,000 but less
than $500,000 ............... 2.50% 2.56% 2.00%
$500,000 but less
than $1,000,000 ............. 2.00% 2.04% 1.60%
$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 that (i) are sponsored by an employer with
at least 100 employees, or (ii) have plan assets of $1 million or more, or
(iii) agree to invest at least $500,000 in the Franklin Templeton Funds over
a 13 month period may buy Class I shares without a front-end sales charge.
Retirement plans that are not Qualified Retirement Plans, 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
objective and policies, and its rules and requirements for exchanges. For
example, some Franklin Templeton Funds do not accept exchanges and others may
have different investment minimums. Some Franklin Templeton Funds do not
offer Class II shares.
METHOD STEPS TO FOLLOW
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 fund, such as "Advisor Class" or "Class Z" shares. Because the
fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class I shares of the fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class I
shares for Advisor Class shares of that fund. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may also exchange their Class Z
shares for Class I shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us signed written instructions. If you would like
your redemption proceeds wired to a bank account, your
instructions should include:
o The name, address and telephone number of the bank where
you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the shares
you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to send
additional documents. Accounts under court jurisdiction may
have other requirements.
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow
account, you must first sign up for the wire feature. To sign
up, send us written instructions, with a signature guarantee.
To avoid any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional accounts
may exceed $50,000 by completing a separate agreement.
Call Institutional Services to receive a copy.
o If there are no share certificates issued for the shares
you want to sell or you have already returned them to the
fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by phone
within the last 15 days
- If you do not want the ability to redeem by phone to apply
to your account, please let us know.
THROUGH
YOUR DEALER Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds 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 591/2, 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 the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, at a rate of up to 1% a
month of an account's Net Asset Value. For example, if you maintain an
annual balance of $1 million in Class I shares, you can redeem up to
$120,000 annually through a systematic withdrawal plan free of charge.
Likewise, if you maintain an annual balance of $10,000 in Class II shares,
$1,200 may be redeemed annually free of charge.
o Distributions from 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 FUND DOES NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will then receive a portion of the price you paid
back in the form of a taxable distribution.
Distribution Options
You may receive your distributions from the fund in any of these ways:
1. Buy additional shares of the fund - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. Buy shares of other Franklin Templeton Funds - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking account, you may need a signature
guarantee.
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
Share Price
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
How and When Shares are Priced
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the 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.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify the
trustees, or
2. A certification for trust
Street or Nominee Accounts. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
Important Information If You Have an Investment Representative
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
Tax Identification Number
The IRS requires us to have your correct Social Security or tax
identification number on a signed shareholder application or applicable tax
form. Federal law requires us to withhold 31% of your taxable distributions
and sale proceeds if (i) you have not furnished a certified correct taxpayer
identification number, (ii) you have not certified that withholding does not
apply, (iii) the IRS or a Securities Dealer notifies the fund that the number
you gave us is incorrect, or (iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if
the IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
Keeping Your Account Open
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $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 the fund.
Under the plan, you can have money transferred automatically from your
checking account to the fund each month to buy additional shares. If you are
interested in this program, please refer to the automatic investment plan
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
Systematic Withdrawal Plan
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking account. Once your plan is
established, any distributions paid by the fund will be automatically
reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us 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.
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 fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
Institutional Accounts
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
Availability of These Services
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and Advisers are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
Advisers - Franklin Advisers, Inc., the fund's investment manager
Board - The Board of Trustees of the Trust
CD - Certificate of deposit
Class I and Class II - The fund offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
fund's portfolio. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans.
Code - Internal Revenue Code of 1986, as amended
Contingency Period - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the
contingency period is 18 months. The holding period for Class II 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.
Distributors - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
Eligible Governmental Authority - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
Franklin Templeton Funds - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the fund's administrator
Investor Services - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
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.
NASD - National Association of Securities Dealers, Inc.
Net Asset Value (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
Offering Price - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 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 AND STRATEGIES OF, AND RISKS
OF AN INVESTMENT IN, THE UNDERLYING FUNDS?
Borrowing. As a fundamental investment restriction, each of the Underlying
Funds (except Value, Mutual Shares, Discovery, European, Developing Markets,
Global Bond, Greater European and Latin America) may not borrow money except
for temporary or emergency purposes. These Underlying Funds may borrow for
such purposes up to the amounts indicated: Equity, Growth, Utilities,
Short-Intermediate, Government Securities, AGE, Gold - 5% of total assets;
Smaller Companies and Templeton Foreign - 5% of total assets for purposes of
redeeming their shares for cancellation; Small Cap, Real Estate, Pacific
Growth, Foreign Smaller - 10% of total assets; Investment Grade - 15% of
total assets; Global Government - 30% of total assets; Natural Resources -
33% of total assets; and German Government and Hard Currency - 331/3% of
total assets.
As a fundamental investment restriction, Value, Developing Markets, Greater
European 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. Because convertible securities have features of both common
stocks and debt securities, their value can be influenced by both interest
rate and market movements. As with a debt security, a convertible security
tends to increase in value when interest rates decline and decrease in value
when interest rates rise. The price of a convertible security is also
influenced by the market value of the underlying common stock. Thus, its
price tends to increase as the value of the underlying stock rises and
decrease as the value of the underlying stock declines. In addition, because
its value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as
its underlying stock.
Enhanced Convertible Securities. Pacific Growth, Foreign Smaller, Gold,
Equity, Growth, Small Cap, Utilities, Value and Real Estate may invest in
convertible preferred stocks that offer enhanced yield features, such as
Preferred Equity Redemption Cumulative Stocks ("PERCS"), which provide
investors, with the opportunity to earn higher dividend income than is
available on a company's common stock. PERCS are preferred stocks that
generally feature a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a stated price.
Most PERCS expire three years from the date of issue, at which time they are
convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the
issuer's common stock is trading at a price below that set by the capital
appreciation limit, and into less than one full share if the issuer's common
stock is trading at a price above that set by the capital appreciation limit.
The amount of that fractional share of common stock is determined by dividing
the price set by the capital appreciation limit by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. If called early, however, the issuer
must pay a call premium over the market price to the investor. This call
premium declines at a preset rate daily, up to the maturity date.
These funds may also invest in other classes of enhanced convertible
securities. These include but are not limited to ACES (Automatically
Convertible Equity Securities), PEPS (Participating Equity Preferred Stock),
PRIDES (Preferred Redeemable Increased Dividend Equity Securities), SAILS
(Stock Appreciation Income Linked Securities), TECONS (Term Convertible
Notes), QICS (Quarterly Income Cumulative Securities) and DECS (Dividend
Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and
DECS all have the following features: they are issued by the company, the
common stock of which will be received in the event the convertible preferred
stock is converted; unlike PERCS, they do not have a capital appreciation
limit; they seek to provide the investor with high current income with some
prospect of future capital appreciation; they are typically issued with
three- or four-year maturities; they typically have some built-in call
protection for the first two to three years; investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will necessarily convert into
either cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described in which these funds may invest, consistent with
their objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Underlying Funds. The fund may have
difficulty disposing of such securities because there may be a thin trading
market for a particular security at any given time. Reduced liquidity may
have an adverse impact on market price and the Underlying Fund's ability to
dispose of particular securities, when necessary, to meet the fund's
liquidity needs or in response to a specific economic event, such as the
deterioration in the credit worthiness of an issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for
the Underlying Fund to obtain market quotations based on actual trades for
purposes of valuing the fund's portfolio. The fund, however, intends to
acquire liquid securities, though there can be no assurances that this will
be achieved.
Synthetic Convertibles. Value, Pacific Growth and Foreign Smaller may invest
portions of their assets in "synthetic convertible" securities. A synthetic
convertible is created by investing in nonconvertible fixed-income securities
and in warrants or stock or stock index call options which grant the holder
the right to purchase a specified quantity of securities within a specified
period of time at a specified price or to receive cash in the case of stock
index options. Synthetic convertible securities are generally not considered
to be "Equity Securities" for the purposes of each fund's investment policy
regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the
values of its fixed-income component and its convertibility component. Thus,
the values of a synthetic convertible and a true convertible security will
respond differently to market fluctuations. Further, although the investment
manager expects normally to create synthetic convertibles whose two
components represent one issuer, the character of a synthetic convertible
allows the fund to combine components representing distinct issuers, or to
combine a fixed-income security with a call option on a stock index, when the
investment manager determines that such a combination would better promote a
fund's investment objectives. In addition, the component parts of a synthetic
convertible security may be purchased simultaneously or separately; and the
holder of a synthetic convertible faces the risk that the price of the stock,
or the level of the market index underlying the convertibility component will
decline.
Currency Fluctuations. Because certain of the Underlying Funds under normal
circumstances will invest a substantial portion of their total assets in the
securities of foreign issuers that are denominated in foreign currencies, the
strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the fund's investment performance. A decline in the value
of any particular currency against the U.S. dollar will cause a decline in
the U.S. dollar value of the fund's holdings of securities denominated in
such currency and, therefore, will cause an overall decline in the fund's Net
Asset Value and any net investment income and capital gains to be distributed
by the fund in U.S. dollars.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors, including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the
movement of interest rates, the pace of business activity in certain other
countries and the U.S., and other economic and financial conditions affecting
the world economy.
Although the Underlying Funds value their assets daily in terms of U.S.
dollars, the funds do not intend to convert their holdings of foreign
currencies into U.S. dollars on a daily basis. Certain funds may do so from
time to time. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the fund at one rate,
while offering a lesser rate of exchange should the fund desire to sell that
currency to the dealer.
Depositary Receipts. Many securities of foreign issuers are represented by
ADRs, EDRs and GDRs (collectively, "Depositary Receipts"). ADRs evidence
ownership of, and represent the right to receive, securities of foreign
issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, an Underlying Fund will avoid
currency risks during the settlement period for either purchases or sales. In
general, there is a large, liquid market in the U.S. for ADRs quoted on a
national securities exchange or on NASDAQ. The information available for ADRs
is subject to the accounting, auditing, and financial reporting standards of
the U.S. market or exchange on which they are traded, which standards are
more uniform and more exacting than those to which many foreign issuers may
be subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there
may not be a correlation between such information and the market value of the
Depositary Receipts.
Depositary Receipts reduce but do not eliminate all the risk inherent in
investing in the securities of foreign issuers. To the extent that an
Underlying Fund acquires Depositary Receipts through banks which do not have
a contractual relationship with the foreign issuer of the security underlying
the Depositary Receipt to issue and service such Depositary Receipts, there
may be an increased possibility that the fund would not become aware of and
be able to respond to corporate actions such as stock splits or rights
offerings involving the foreign issuer in a timely manner.
Developing or Emerging Market Countries. Investments in companies domiciled
in developing countries may be subject to potentially higher risks than
investments in developed countries. These risks include (i) less social,
political, and economic stability; (ii) the small current size of the markets
for such securities and the currently low or nonexistent volume of trading,
which results in a lack of liquidity and in greater price volatility; (iii)
certain national policies which may restrict a fund's investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; (v) the
absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the
absence, until recently in certain Eastern European countries, of capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, some developing market countries have experienced substantial,
and in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may continue
to have negative effects on the economies and securities markets of certain
countries. Moreover, the economies of some developing countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
To the extent of the Communist Party's influence, investments in such
countries may involve risks of nationalization, expropriation and
confiscatory taxation. The communist governments of a number of Eastern
European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event
of such expropriation, a fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in Eastern European countries. Finally, even though certain
Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to an Underlying Fund and its shareholders.
There are further risks specific to investments in Eastern Europe, including
Russia, Hong Kong and/or Latin America. For a further discussion of these
risks, please see the SAI.
Equipment Related Instruments. Global Government may purchase equipment trust
certificates, equipment lease certificates, and conditional sales contracts.
Equipment related instruments are used to finance the acquisition of new
equipment. The instrument gives the bondholder the first right to the
equipment in the event that interest and principal are not paid when due.
Title to the equipment is held in the name of the trustee, usually a bank,
until the instrument is paid off. Equipment related instruments usually
mature over a period of 10 to 15 years. In practical effect, equipment trust
certificates, equipment lease certificates and conditional sales contracts
are substantially identical; they differ mainly in legal structure. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
German Government Bonds. The primary risk factors associated with investment
in German government obligations arise in connection with market fluctuations
in the level of German interest rates and in the exchange rate between the
U.S. dollar and the German mark. At any given point in time, the impact of
interest rate and currency exchange rate changes on German Government's Net
Asset Value may be reinforcing or offsetting.
The yield and total return of German Government may be higher or lower than
the yield and total return of a fund investing in U.S. dollar-denominated
bonds of comparable maturity and quality. In addition, due to periodic
interest rate and exchange rate volatility, the fund's Net Asset Value is
likely to experience significant volatility from time to time, and this
volatility may be greater than would be experienced by a comparable U.S.
dollar-denominated bond fund.
Because of its investment primarily in German mark-denominated obligations
and its policy of not hedging currency risk, German Government's Net Asset
Value will likely exhibit greater day-to-day volatility than a fund that
diversifies its currency risk across multiple currencies and/or regularly
hedges its currency risk. Even though interest rates on German government
obligations may from time to time exceed the rates on U.S. dollar-denominated
bonds of comparable maturity and quality, a decline in the German mark
relative to the U.S. dollar over any given period could more than offset any
interest rate advantage, resulting in a negative total return for German
Government over that period.
German interest rates and currency valuations have fluctuated unpredictably
in the past and can be expected to do so in the future.
The following information is a brief summary of factors affecting German
Government and does not purport to be a complete description of such factors.
The information is based primarily upon information derived from public
documents relating to securities offerings of issuers of German government
obligations, from independent credit reports and historically reliable
sources, but has not been independently verified by German Government, the
Underlying Funds or the Funds.
The Federal Republic of Germany, which comprises what was formerly the
nations of East Germany and West Germany, is considered by the rating
agencies and by the fund's investment managers to be among the world's most
creditworthy issuers of debt obligations. Both S&P and Moody's have assigned
their highest ratings (AAA/Aaa) to obligations of the Federal Republic of
Germany.
The German mark is considered to be the primary reserve currency of Europe
and, along with the Japanese yen, has increasingly been used as a reserve
currency worldwide, sharing the traditional role of the U.S. dollar. Because
of Germany's strong record of economic growth and responsible fiscal and
monetary policy, the mark has been among the strongest of the world's major
currencies in the period dating back to the return of freely floating
exchange rates in the early 1970s. Of course, there can be no assurance that
the German mark will perform or be regarded in the future as it has in the
past.
The Bundesbank (the German central bank) operates largely independently of
Germany's political system and is charged with responsibility for protecting
the international value of the German mark. In response to the high levels of
unification-related public and private expenditures and the inflationary
pressures arising from these expenditures, the Bundesbank has maintained a
tight monetary policy in recent years, resulting in interest rates well above
those in the U.S., Japan and other countries outside Europe. In mid-1992,
German interest rates began to decline as continued tight monetary policy
created expectations of economic slowing. This decline in German rates
continued through the end of 1993 as the German economy suffered a
significant recession and the Bundesbank accelerated the easing process.
During the first quarter of 1994, German yields began to rise as signs of
economic growth emerged in the German economy.
The unification of East Germany and West Germany and the ensuing efforts to
raise living standards and modernize infrastructure in what was previously
East Germany have been a costly undertaking for Germany. Much of the cost of
unification has been financed through deficit spending, resulting in
significantly increased public-sector borrowing requirements since 1989. The
ongoing high levels of public-sector borrowing and spending in Germany
resulting from unification may cause German interest rates and inflation
rates to be higher than would otherwise be the case. This, in turn, may
adversely affect the total returns on German government obligations.
Unification has placed great pressure on the German economy and, although
progress has recently been made to improve German government finances, these
pressures may adversely affect monetary policy as conducted by the Bundesbank
as well as the credit quality of German government obligations.
In addition to unification, the disintegration of the Soviet Union and its
sphere of influence also may have an adverse impact on the German economy. In
particular, Germany may be subject to increased immigration pressures and
social discord. Germany also faces uncertainty with respect to repayment of
government-guaranteed loans made to former eastern bloc countries.
GNMAs. As with most bonds, in a period of rising interest rates, the value of
a GNMA will generally decline. In a period of declining interest rates,
however, it is more likely that mortgages contained in GNMA pools will be
prepaid, thus reducing the effective yield. This potential for prepayment
during periods of declining interest rates may reduce the general upward
price increases of GNMAs as compared to the increases experienced by
non-callable debt securities over the same periods. Moreover, any premium
paid on the purchase of a GNMA will be lost if the obligation is prepaid. Of
course, price changes of GNMAs and other securities held by a fund will have
a direct impact on the Net Asset Value per share of the fund.
High Yield, Fixed-Income Securities. High yield, fixed-income securities
frequently have call or buy-back features that allow an issuer to redeem the
securities from a fund or Underlying Fund. Although these securities are
typically not callable for a period of time, usually three to five years from
the date of issue, if an issuer calls its securities during periods of
declining interest rates, the investment manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income. Under the Code and
U.S. Treasury regulations, the Underlying Fund may have to accrue income on
defaulted securities and distribute the income to shareholders for tax
purposes, even though the fund is not currently receiving interest or
principal payments on the defaulted securities. To generate cash to satisfy
these distribution requirements, the fund may have to sell portfolio
securities that it otherwise may have continued to hold or use cash flows
from other sources, such as the sale of fund shares.
A fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally
tends to be concentrated among a smaller number of dealers than is the case
for securities that trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other
institutional buyers, rather than individuals. To the extent the secondary
trading market for a particular high yielding, fixed-income security does
exist, it is generally not as liquid as the secondary market for higher rated
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price and a fund's ability to dispose of particular issues,
when necessary, to meet the fund's liquidity needs or in response to a
specific economic event, such as a deterioration in the creditworthiness of
the issuer. Reduced liquidity in the secondary market for certain securities
may also make it more difficult for an Underlying Fund to obtain market
quotations based on actual trades for purposes of valuing the fund's
portfolio. Current values for these high yield issues are obtained from
pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales.
Equity, Growth, Utilities, Gold, Natural Resources, Small Cap, Real Estate,
Value, AGE, Foreign Smaller and Global Government may buy high yield,
fixed-income securities that are sold without registration under the federal
securities laws and therefore carry restrictions on resale. While many high
yielding securities have been sold with registration rights, covenants and
penalty provisions for delayed registration, if a fund is required to sell
restricted securities before the securities have been registered, it may be
deemed an underwriter of the securities under the Securities Act of 1933,
which entails special responsibilities and liabilities. A fund may also incur
special costs in disposing of restricted securities, although the fund will
generally not incur any costs when the issuer is responsible for registering
the securities.
Equity, Growth, Utilities, Gold, Natural Resources, Small Cap, Real Estate,
Value, AGE, Foreign Smaller and Global Government may buy high yield,
fixed-income securities during an initial underwriting. These securities
involve special risks because they are new issues. The investment manager
will carefully review their credit and other characteristics. The funds have
no arrangement with their underwriters or any other person concerning the
acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities as well as the ability of issuers of high
yield securities to make timely principal and interest payments. Although the
economy has improved and high yield securities have performed more
consistently since that time, the adverse effects previously experienced may
reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer.
Factors adversely impacting the market value of high yield securities may
lower the Underlying Fund's Net Asset Value. In addition, a fund may incur
additional expenses to the extent it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
Illiquid Securities. An illiquid security is a security that cannot be sold
within seven days in the normal course of business for approximately the
amount at which the fund has valued the security. Equity, Growth, Utilities,
Small Cap, Value, Real Estate, Short-Intermediate, Government Securities,
Investment Grade, AGE, Hard Currency, Developing Markets, Templeton Foreign,
Smaller Companies, Global Bond, Global Government, Pacific Growth, Foreign
Smaller, German Government and Gold may not purchase an illiquid security if,
at the time of purchase, the fund would have more than 10% of its total net
assets invested in such securities. Natural Resources, Mutual Shares,
Discovery, European, Greater European and Latin America may invest up to 15%
of their respective total assets in illiquid securities.
Investment Company Securities. Certain of the Underlying Funds may invest in
other investment companies to the extent permitted by the 1940 Act and
exemptions thereto. To the extent that a fund invests in an investment
company, there may be duplication of advisory and other fees.
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, Short-Intermediate, Investment Grade, AGE,
Mutual Shares, Discovery, European, Greater European, Developing Markets,
German Government, 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, German
Government's and Hard Currency's total assets, 33% of Natural Resources'
total assets and, 33 1/3% of 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 and asset-backed securities are often
subject to more rapid repayment than their stated maturity dates would
indicate because of the pass-through of prepayments of principal on the
underlying loans. During periods of declining interest rates, prepayment of
loans underlying mortgage-backed and asset-backed securities can be expected
to accelerate, and thus impair a fund's ability to reinvest the returns of
principal at comparable yields. Accordingly, the market values of these
securities will vary with changes in market interest rates generally and in
yield differentials among various kinds of U.S. government securities and
other mortgage-backed and asset-backed securities. The market value of
mortgage-backed securities will generally decline when interest rates rise
and rise when interest rates decline. However, mortgage-backed securities may
have less potential for capital appreciation than other investments of
comparable maturities due to the likelihood of increased prepayments of
mortgages as interest rates decline. In addition, to the extent such
securities are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of a fund's principal
investment to the extent of the premium paid.
Asset-backed securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that
is comparable to mortgage assets. There is the possibility that, in some
cases, recoveries on repossessed collateral may not be available to support
payments on these securities. CARs are asset-backed securities. In the case
of automobile receivables, there is a risk that the holders of these
receivables may not have either a proper or first security interest in all of
the obligations backing the receivables due to the large number of vehicles
involved in a typical issuance and technical requirements under state law.
Therefore, recoveries on repossessed collateral may not always
be available to support payments on the securities.
New or Unseasoned Companies. Certain Underlying Funds may invest in the
securities of relatively new or unseasoned companies which are in their early
stages of development or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. These companies may have relatively small revenues, limited product
lines, and a small share of the market for their products or services. Small
companies may lack depth of management and may be unable to generate the
funds necessary for growth or potential development. In addition, these
companies may be developing or marketing new products and services for which
markets are not yet or may never become established. As a result, small
companies may suffer significant losses as well as realize substantial
growth, and investments in such companies tend to be volatile and, therefore,
speculative.
Non-diversification. As non-diversified investment companies under the the
federal securities laws, Value, Natural Resources, Real Estate, Global Bond,
German Government, Hard Currency and Global Government may concentrate their
investments in the securities of a smaller number of issuers than if they
were diversified companies. An investment in a non-diversified fund entails
greater risk than an investment in a diversified investment company because a
higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of the fund's portfolio, and economic,
political, or regulatory developments may have a greater impact on the value
of the fund's portfolio than would be the case if the portfolio were
diversified among more issuers.
Public Utilities Securities. The risks of investments in the Public Utilities
Industry include: risks associated with regulatory changes; risks associated
with interest rate fluctuations; the difficulty of obtaining adequate returns
on invested capital in spite of frequent rate increases; the difficulty of
financing large construction programs during inflationary periods;
restrictions on operations and increased costs and delays attributable to
environmental considerations; difficulties of the capital markets in
absorbing utility debts and equity securities; difficulties in obtaining fuel
for electric generation at reasonable prices; risks associated with the
operation of nuclear power plants; and general effects of energy conservation.
REITs and other Real Estate-Related Investments. Equity, Developing Markets,
AGE, Small Cap, 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. In order to qualify
as a REIT, a company must invest primarily in real estate-related
investments, and distribute virtually all of its taxable income to
shareholders. Equity does not intend to invest more than 10% of its total
assets in REITs. AGE, Natural Resources and Developing Markets will not
invest more than 10% of their assets in REITs.
REIT investments are subject to risks common to all real estate investing,
namely declines in the value of real estate, changes in general and local
economic conditions, overbuilding and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, variations in rental income, changes in neighborhood
values, the appeal of properties to tenants, and increases in interest rates.
REITs are also subject to a number of risks directly related to their
operations. For example, the success of a REIT depends upon large inflows of
cash flowing from the underlying real estate investments. REITs are also
subject to the possibility of failing to qualify for tax-free pass-through of
income under the Code and to maintain exemption from the federal securities
law registration requirements.
Repurchase Agreements. Each fund and Underlying Fund except Government
Securities may engage in repurchase agreement transactions. In a repurchase
agreement, the fund buys U.S. government securities from a bank or
broker-dealer at one price and agrees to sell them back to the bank or
broker-dealer at a higher price on a specified date. The securities subject
to resale are held on behalf of the fund by a custodian bank approved by the
Underlying Fund's Board of Directors or Board of Trustees. The bank or
broker-dealer must transfer to the custodian bank securities with an initial
market value of at least 102% of the repurchase price to help secure the
obligation to repurchase the securities at a later date. The securities are
then marked-to-market daily to maintain coverage of at least 100%. If the
bank or broker-dealer does not repurchase the securities as agreed, the fund
may experience a loss or delay in the liquidation of the securities
underlying the repurchase agreement and may also incur liquidation costs. The
fund, however, intends to enter into repurchase agreements only with banks or
broker-dealers that are considered creditworthy by Advisers.
Restricted Securities. Certain of the Underlying Funds may invest a specific
percentage of their total assets in restricted securities. Restricted
securities involve certain risks, including the risk that a secondary market
may not exist when a holder wants to sell them. In addition, the price and
valuation of these securities may reflect a discount because they are
perceived as having less liquidity than the same securities that are not
restricted. If a fund suddenly has to sell restricted securities, time
constraints or lack of interested, qualified buyers may prevent the fund from
receiving the value at which the securities are carried on the books of the
fund at the time of the sale. Alternatively, the investment manager may sell
unrestricted securities it might have retained if the fund had only held
unrestricted securities.
Reverse Repurchase Agreements. Small Cap, Global Government,
Short-Intermediate and Natural Resources may enter into reverse repurchase
agreements. These agreements involve the sale of securities held by the funds
pursuant to an agreement to repurchase the securities at an agreed-upon
price, date, and interest payment. When entering into reverse repurchase
transactions, cash or securities of a dollar amount equal in value to the
funds' obligation under the agreement, including any earned but unpaid
interest, will be maintained in a segregated account with each fund's
respective custodian bank. The value of the securities subject to the reverse
repurchase agreement will be determined daily.
Reverse repurchase agreement transactions involve the risk that the market
value of the securities sold by the fund may decline below the repurchase
price of the securities subject to the agreement and the risk that a default
by the purchaser may cause the fund to experience a loss.
Short Sales. Value may make short sales and short sales "against the box" up
to 25% of its net assets. At any time, it will not have more than 15% of the
value of its net assets in deposits or short sales "against the box." Global
Government may make short sales "against the box," provided that it will not
have more than 10% of its Net Asset Value held as collateral for such short
sales. Mutual Shares, 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. Short sales are transactions in which the fund sells a
security it does not own in anticipation of a decline in the market value of
that security. In a short sale "against the box," the fund owns or has the
immediate and unconditional right to acquire at no additional cost the
identical security. Possible losses from short sales differ from losses that
could be incurred from a purchase of a security because losses from short
sales may be unlimited, whereas losses from purchases can equal only the
total amount invested.
Small Capitalization Stocks. Small capitalization stocks have historically
been more volatile in price than the larger capitalization stocks. Among the
reasons for the greater price volatility of these securities are the less
certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks, and the greater sensitivity of small companies
to changing economic conditions. Small company stocks also may, to a degree,
fluctuate independently of larger company stocks. Small company stocks may
decline in price as large company stocks rise, or rise in price as large
company stocks decline. Small capitalization stocks may have many of the
characteristics of securities of new or unseasoned companies as described
above.
Standby Commitment Agreements. Natural Resources may from time to time enter
into standby commitment agreements. Such agreements commit the fund, for a
stated period of time, to purchase a stated amount of a security which may be
issued and sold to the fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. At the time of
entering into the agreement, the fund is paid a commitment fee, regardless of
whether the security is ultimately issued, which is typically approximately
0.5% of the aggregate purchase price of the security which the fund has
committed to purchase. The fund will enter into such agreements only for the
purpose of investing in the security underlying the commitment at a yield
and/or price which is considered advantageous to the fund. The fund will not
enter into a standby commitment with a remaining term in excess of 45 days
and will limit its investment in such commitments so that the aggregate
purchase price of the securities subject to such commitments, together with
the value of portfolio securities subject to legal restrictions on resale,
will not exceed 15% of its net assets, taken at the time of acquisition of
such commitment or security. The fund will at all times maintain a segregated
account with its custodian bank of cash, cash equivalents, U.S. government
securities or other high-grade securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery
date may be more or less than its purchase price. Since the issuance of the
security underlying the commitment is at the option of the issuer, the fund
may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the fund's Net Asset Value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
Structured Investments. Templeton Foreign, Smaller Companies, Global Bond,
Developing Markets, Greater European and Latin America may invest in
structured investments. Structured investments involve entities organized and
operated solely for the purpose of restructuring the investment
characteristics of various securities. These entities are typically organized
by investment banking firms which receive fees in connection with
establishing each entity and arranging for the placement of its securities.
This type of restructuring involves the deposit with or purchase by an
entity, such as a corporation or trust, of specified instruments and the
issuance by that entity of one or more classes of securities ("Structured
Investments") backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued Structured Investments to create securities with
different characteristics such as varying maturities, payment priorities or
interest rate provisions; the extent of the payments made with respect to
Structured Investments is dependent on the extent of the cash flow on the
underlying instruments.
Structured Investments may be of a class that is subordinated or
unsubordinated to the right of payment of another class. Subordinated
Structured Investments typically have higher yields and present greater risks
than unsubordinated Structured Investments. Structured Investments are
typically sold in private placement transactions, and there currently is no
active trading market for Structured Investments. To the extent such
investments are illiquid, they will be subject to a fund's restriction on
investments in illiquid securities.
Temporary Investments. Several of the Underlying Funds have an express policy
regarding temporary cash investments. Under certain circumstances, including
in anticipation of and during temporary defensive periods, for liquidity
purposes and to meet redemption requests, these Underlying Funds may invest
in a variety of securities (some of the funds without limit). The types of
securities in which the funds may invest for these purposes may include bonds
and other debt obligations of companies of various nations throughout the
world, debt obligations of the U.S. government or its political subdivisions
(including obligations issued or guaranteed by U.S. government agencies or
instrumentalities), debt obligations of other governments, bank obligations
(CDs, letters of credit and bankers' acceptances or instruments secured by
these obligations), time deposits, commercial paper, repurchase agreements,
money market securities denominated in U.S. dollars or in the currency of any
foreign country, and shares of affiliated money market funds. Certain
Underlying Funds may also invest temporarily in high risk, lower quality debt
obligations.
Trade Claims. AGE, Value, Mutual Shares, 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, German Government, Global
Government and Global Bond may purchase and sell obligations on a
"when-issued" or "delayed delivery" basis. Natural Resources, AGE,
Short-Intermediate and Global Government are not subject to any percentage
limit with respect to these types of obligations. German Government may only
invest up to 25% of its assets in such transactions. These transactions are
arrangements in which a fund purchases securities with payment and delivery
scheduled for a future time, generally within two weeks. Although AGE, Real
Estate, Natural Resources and Short-Intermediate will generally purchase
securities on a when-issued basis with the intention of acquiring the
securities, they may sell the securities before the settlement date if it is
deemed advisable. When a fund is the buyer in these transactions, it will
maintain with its custodian bank, in an account that is separate and apart
from its normal custody account, cash or securities having a total value
equal to the amount of the fund's commitment until payment for the obligation
is made. Government Securities may purchase and sell GNMA certificates on a
"To-Be-Announced" ("TBA") and "delayed delivery" basis, and is not subject to
any percentage limit with respect to these transactions. These transactions
are arrangements under which the fund may purchase securities with payment
and delivery scheduled for a future time up to 60 days after purchase.
Purchases of securities on a when-issued, delayed delivery or TBA basis are
subject to market fluctuation and the risk that the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. If the other party to a when-issued,
delayed delivery or TBA transaction fails to complete the transaction, the
fund could miss a favorable price or yield opportunity. Securities purchased
on a when-issued, delayed delivery or TBA basis do not generally earn
interest until their scheduled delivery date.
Zero Coupon and Pay-In-Kind Bonds. The credit risk factors pertaining to
lower rated securities also apply to lower rated zero coupon, deferred
interest, and pay-in-kind bonds. These bonds carry an additional risk in
that, unlike bonds that pay interest throughout the period to maturity, the
fund will realize no cash until the cash payment date and, if the issuer
defaults, the fund may obtain no return at all on its investment. Zero
coupon, deferred interest, and pay-in-kind bonds involve additional special
considerations.
Zero coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payments of interest prior to maturity or
a specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount
from their face amounts or par value. The discount varies depending on the
time remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date of the
security approaches. The market prices of zero coupon securities are
generally more volatile than the market prices of securities that pay
interest periodically and are likely to respond to changes in interest rates
to a greater degree than do non-zero coupon or deferred interest securities
having similar maturities and credit quality.
Mutual Shares, Discovery, European, Smaller Companies, Templeton Foreign,
Greater European, Latin America, Global Bond, AGE and Value may purchase
pay-in-kind bonds. Pay-in-kind bonds are securities that pay interest through
the issuance of additional bonds. The fund will be deemed to receive interest
over the life of such bonds and be treated as if interest were paid on a
current basis for federal income tax purposes, although no cash interest
payments are received by the fund until the cash payment date or until the
bonds mature. Accordingly, during periods when the fund receives no cash
interest payments on its zero coupon securities or deferred interest or
pay-in-kind bonds, it may be required to dispose of portfolio securities to
meet distribution requirements and such sales may be subject to the risk
factors discussed above. AGE and Value are not limited in the amount of their
assets that may be invested in these securities.
DESCRIPTION OF RATINGS
Corporate Bond Ratings
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be 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.
